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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-27559
TEXTRON FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 05-6008768
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
40 WESTMINSTER STREET, P.O. BOX 6687, PROVIDENCE, R.I. 02940-6687
(401) 621-4200
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF CLASS WHICH REGISTERED
-------------- ------------------------
<S> <C>
$400,000,000 FLOATING RATE NOTES NEW YORK STOCK EXCHANGE
DUE DECEMBER 9, 2002
$600,000,000 7 1/8% NOTES NEW YORK STOCK EXCHANGE
DUE DECEMBER 9, 2004
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $100.00 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (Not applicable).
All of the shares of common stock of the registrant are owned by Textron
Inc.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
I (1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I.
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 14
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 19
Item 8. Financial Statements and Supplementary Data................. 20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 40
PART III.
Item 10. Directors and Executive Officers of the Registrant.......... 40
Item 11. Executive Compensation...................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 40
Item 13. Certain Relationships and Related Transactions.............. 40
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 41
</TABLE>
1
<PAGE> 3
PART I.
ITEM 1. BUSINESS
GENERAL
Textron Financial Corporation (the "Company" or "TFC") is a diversified
commercial finance company with operations in three active business segments:
Term Loans and Leases, Revolving Credit, and Specialty Finance. Term lending and
leasing activity is focused in aircraft, equipment, and golf finance. Revolving
credit products consist primarily of dealer inventory finance, factoring, and
working capital loans. Specialty finance operations include broadcast media
finance, franchise finance, receivables finance, and structured investment grade
transactions. TFC's other financial services and products include transaction
syndication, equipment appraisal and management, portfolio servicing, and
insurance brokerage.
All of TFC's stock is owned by Textron Inc. ("Textron"), a multi-industry
company with market-leading operations in Aircraft, Automotive, Industrial, and
Finance. At January 1, 2000, 21% of TFC's managed finance receivables were
related to Textron or Textron's products ("Textron-related receivables"). TFC
has full recourse to Textron on approximately three-quarters of managed
Textron-related receivables. For further information on TFC's relationship with
Textron, see "Relationship with Textron" below.
TFC's financing activities are confined almost exclusively to commercial
markets and to lease and secured lending products. The Company's services are
offered primarily in North America. However, TFC does finance
Textron-manufactured products worldwide, principally Bell helicopters and Cessna
aircraft in South America.
TFC has approximately 34 offices nationwide, with division offices or
operation centers in Tempe, AZ; East Hartford, CT; Alpharetta, GA; Portland, OR;
Columbus, OH; King of Prussia, PA; Wichita, KS; Williamstown, MA; Minneapolis,
MN; and Providence, RI. The Company's principal executive offices are located at
40 Westminster Street, Providence, RI 02903.
RECENT ACQUISITIONS
TFC has grown through a combination of internal expansion and selective
acquisition. Acquisitions have been complementary to the Company's business
segments. Acquired businesses must have meaningful transaction origination
capabilities and credit standards compatible with TFC's and, when integrated
with TFC, must meet certain return on investment standards established by
Textron. There have been six significant acquisitions by TFC within the last
five years. These acquisitions are described in Note 3 to TFC's audited
Consolidated Financial Statements in Item 8 of this Form 10-K.
DESCRIPTION OF BUSINESS SEGMENTS AND OPERATING UNITS
TFC provides a wide range of leasing, financing, and related services
through the following four business segments:
- Term Loans and Leases
- Revolving Credit
- Specialty Finance
- Commercial Real Estate (inactive)
In addition, TFC's Capital Markets Group and TBS Insurance Agency Services,
Inc., provide support and ancillary products for most of the Company's operating
units. The Capital Markets Group provides loan syndication, warehouse
facilities, and advisory services for TFC's operating units and their customers.
TBS Insurance Agency Services, Inc., structures insurance programs and products
for the Company's customers and employees. For additional information regarding
TFC's business segments, see below and Note 15 to TFC's audited Consolidated
Financial Statements in Item 8 of this Form 10-K.
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Term Loans and Leases
Aircraft Finance -- TFC provides financing to commercial users and, to a
minor extent, consumer users of general aviation equipment. The Company finances
new and used Bell helicopters. TFC's Cessna Finance Corporation subsidiary
specializes in the financing of new and used Cessna business jets and
single-engine piston aircraft. The Company also has expertise in financing a
variety of other general aviation aircraft and equipment.
Equipment Finance -- TFC finances an assortment of capital equipment
through vendor-sponsored financing programs and through direct customer
solicitation. Existing vendor programs promote the lease or purchase of
automotive service and repair equipment, machine tools and other industrial
equipment, and office automation equipment. Direct solicitation activity is
focused on TFC's existing customers and operators of mobile amusement equipment.
The Company is skilled in performing equipment appraisals, asset inspections,
and repossession and re-marketing of equipment. Through its Asset Control
Services operation, TFC offers these services to third parties.
Golf Finance -- TFC provides term financing and leasing to golf course
operators. The Company makes first mortgage loans for the construction,
acquisition or refinancing of golf course facilities, and provides financing
programs for the lease or purchase of E-Z-Go golf cars and Textron Turf Care
equipment (including the Jacobsen, Ransomes, and Cushman product lines).
The following table sets forth certain financial information regarding the
various businesses included in the Term Loans and Leases segment for the periods
indicated:
<TABLE>
<CAPTION>
1999 1998 1997
---------- -------- --------
(In thousands)
<S> <C> <C> <C>
AIRCRAFT FINANCE
New business volume(1).................................... $ 853,662 $787,863 $686,791
Total finance assets...................................... 1,444,362 882,609 818,838
Revenues.................................................. 103,264 94,021 95,832
Nonperforming assets...................................... 11,575 4,806 6,501
Revenues as a percentage of total revenues................ 22.31% 25.61% 27.36%
Ratio of net charge-offs (recoveries) to average finance
assets.................................................. 0.20% (0.14%) (0.19%)
EQUIPMENT FINANCE
New business volume(1).................................... $ 412,206 $423,751 $378,371
Total finance assets...................................... 746,135 843,639 663,118
Revenues.................................................. 98,550 74,228 83,142
Nonperforming assets...................................... 26,601 29,151 25,357
Revenues as a percentage of total revenues................ 21.29% 20.22% 23.74%
Ratio of net charge-offs to average finance assets........ 1.41% 1.66% 1.86%
GOLF FINANCE
New business volume....................................... $ 463,060 $360,718 $255,034
Total finance assets...................................... 736,076 418,181 457,666
Revenues.................................................. 54,357 48,394 61,445
Nonperforming assets...................................... 12,116 -- 2,204
Revenues as a percentage of total revenues................ 11.74% 13.18% 17.54%
Ratio of net charge-offs to average finance assets........ 0.02% 0.02% 0.05%
</TABLE>
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(1) Excludes business acquisitions.
3
<PAGE> 5
Revolving Credit
Asset-Based Lending and Factoring -- TFC provides working capital loans
secured by accounts receivable, inventory, and equipment to middle-market
companies. The Company also provides specialized financing and factoring
products to the trucking and telephone service industries.
Floorplan Finance -- TFC structures inventory finance programs for dealers
and distributors of music, marine, portable spa, wood stove, lawn and garden,
specialty trailer, and manufactured housing products, among others. The Company
also provides programs for E-Z-Go golf cars, Textron Turf Care equipment, and
OmniQuip light construction equipment.
The following table sets forth certain financial information regarding the
various businesses included in the Revolving Credit segment for the periods
indicated:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- --------
(In thousands)
<S> <C> <C> <C>
ASSET-BASED LENDING AND FACTORING
New business volume(1).................................. $1,093,449 $ 926,476 $200,399
Total finance assets.................................... 489,415 312,202 184,039
Revenues................................................ 49,421 35,648 18,903
Nonperforming assets.................................... 15,529 -- --
Revenues as a percentage of total revenues.............. 10.68% 9.71% 5.40%
Ratio of net charge-offs to average finance assets...... 1.15% 0.05% --
FLOORPLAN FINANCE
New business volume..................................... $1,201,224 $1,048,713 $814,652
Total finance assets.................................... 588,155 518,963 364,176
Revenues................................................ 61,949 52,187 43,881
Nonperforming assets.................................... 5,692 4,518 5,848
Revenues as a percentage of total revenues.............. 13.38% 14.21% 12.53%
Ratio of net charge-offs to average finance assets...... 0.21% 0.32% 0.60%
</TABLE>
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(1) Excludes business acquisitions.
Specialty Finance
Broadcast Media Finance -- TFC provides finance programs to broadcast media
operators for station and equipment acquisitions. Loans are structured using
conventional products and, through Westminster Development Bank, a TFC
subsidiary, Small Business Administration ("SBA") products (i.e., government
guaranteed loans).
Franchise Finance -- TFC offers finance programs to franchisees of
well-established franchise concepts for business acquisitions, new store
packages, image enhancements, equipment upgrades, and debt refinancings. Loans
are structured using both conventional and SBA products.
Receivables Finance -- TFC offers inventory and notes receivable financing
to developers of: vacation interval resorts, residential homesites (primarily
for manufactured housing), and recreational land lots. Acquisition and
construction loans are also provided to these developers. The Company also
provides receivable financing arrangements for small and mid-sized finance
companies operating in niche market segments. TBS Business Services, Inc., a TFC
subsidiary, provides servicing of vacation interval loan portfolios for resort
developers.
Structured Finance -- TFC manages an existing portfolio of leveraged
leases, and selectively invests in new leveraged lease transactions. These
transactions involve the long-term lease of real estate and equipment to
investment grade lessees. The Company also participates in investment grade, or
near investment grade, structured secured term and revolving credit facilities,
and equity investments.
4
<PAGE> 6
The following table sets forth certain financial information regarding the
various businesses included in the Specialty Finance segment for the periods
indicated:
<TABLE>
<CAPTION>
1999 1998 1997
---------- -------- --------
(In thousands)
<S> <C> <C> <C>
BROADCAST MEDIA FINANCE
New business volume....................................... $ 72,035 $ 21,905 $ 23,948
Total finance assets...................................... 69,722 21,288 11,787
Revenues.................................................. 5,494 2,710 1,745
Nonperforming assets...................................... 749 -- --
Revenues as a percentage of total revenues................ 1.19% 0.74% 0.50%
Ratio of net charge-offs to average finance assets........ 0.29% -- 0.10%
FRANCHISE FINANCE
New business volume(1).................................... $ 19,652 $ 22,320 $ 2,341
Total finance assets...................................... 245,334 22,889 2,425
Revenues.................................................. 7,964 987 178
Nonperforming assets...................................... 773 120 --
Revenues as a percentage of total revenues................ 1.72% 0.27% 0.05%
Ratio of net charge-offs (recoveries) to average finance
assets.................................................. 0.09% (0.06%) 0.45%
RECEIVABLES FINANCE
New business volume(1).................................... $ 713,479 $392,832 $350,144
Total finance assets...................................... 1,004,559 336,995 306,145
Revenues.................................................. 54,116 39,121 28,298
Nonperforming assets...................................... 10,687 9,883 924
Revenues as a percentage of total revenues................ 11.69% 10.65% 8.08%
Ratio of net charge-offs (recoveries) to average finance
assets.................................................. 0.16% 0.02% (0.01%)
STRUCTURED FINANCE
New business volume....................................... $ 91,418 $ 84,678 --
Total finance assets...................................... 396,477 341,481 $322,786
Revenues.................................................. 27,728 19,867 15,143
Nonperforming assets...................................... 100 -- --
Revenues as a percentage of total revenues................ 5.99% 5.41% 4.32%
Ratio of net charge-offs to average finance assets........ 0.17% -- --
</TABLE>
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(1) Excludes business acquisitions.
Commercial Real Estate
In 1993, the Company ceased commercial real estate lending activities and
began to orderly liquidate that portfolio.
5
<PAGE> 7
The following table sets forth certain financial information regarding the
Commercial Real Estate segment for the periods indicated:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
COMMERCIAL REAL ESTATE
New business volume......................................... -- -- --
Total finance assets........................................ $12,832 $31,740 $49,661
Revenues.................................................... 60 (1) 1,653
Nonperforming assets........................................ 17,056 38,189 58,559
Revenues as a percentage of total revenues.................. 0.01% -- 0.47%
Ratio of net charge-offs to average finance assets.......... 9.76% 12.92% 7.25%
</TABLE>
COMPETITION
The markets in which TFC operates are highly fragmented and extremely
competitive. They are characterized by competitive factors that vary, to some
extent, by product and geographic region. TFC's competitors include:
- Commercial finance companies;
- National and regional banks and thrift institutions;
- Insurance companies;
- Leasing companies; and
- Finance operations of equipment vendors.
Competition has intensified in recent years as the result of an improving
economy, easier access to capital, and a heightened awareness of the
attractiveness of the commercial finance markets. The rapid expansion of
securitization products has dramatically eased access to capital, breaking down
a significant barrier to entry for new competitors.
TFC competes primarily on the basis of pricing, terms, structure, and
service. Competitors often seek to compete aggressively on the basis of these
factors. The Company may lose market share to the extent that it is unwilling to
match competitors' practices. To the extent that TFC matches these practices,
the Company may experience decreased margins and/or increased risk of credit
losses. Many of TFC's competitors are large companies that have substantial
capital, technological, and marketing resources. This has become increasingly
the case given the recent surge in consolidation activity in the commercial
finance industry. In some instances, TFC's competitors have access to capital at
a lower cost than TFC.
RELATIONSHIP WITH TEXTRON
General
TFC derives a significant portion of its business from financing the sale
and lease of products manufactured by Textron. In 1999, 1998, and 1997, TFC paid
Textron $1,260 million, $980 million, and $736 million, respectively, for the
purchase of finance assets. TFC recognized finance charge revenues from Textron
and its affiliates (net of payments or reimbursements for interest charged at
more or less than market rates on Textron-manufactured products) of $7.2 million
in 1999, $3.7 million in 1998, and $0.1 million in 1997.
TFC and Textron utilize an intercompany account for the allocation of
Textron overhead charges, and for the settlement of receivables purchased by TFC
from Textron and its affiliates. For additional information regarding the
relationship between TFC and Textron, see Note 2 to TFC's audited Consolidated
Financial Statements in Item 8 of this Form 10-K.
6
<PAGE> 8
Agreements with Textron
TFC and Textron are parties to several agreements which govern various
aspects of the TFC-Textron relationship. They are described below:
Receivables Purchase Agreement
Under a Receivables Purchase Agreement with Textron, TFC has recourse to
Textron with respect to most finance receivables and leases relating to products
manufactured and sold by Textron. Under the Receivables Purchase Agreement,
Textron also makes available to TFC a line of credit of up to $100 million for
junior subordinated borrowings at the prime interest rate.
Support Agreement with Textron
Under a Support Agreement with Textron dated as of May 25, 1994, Textron is
required to pay to TFC, quarterly, an amount sufficient to provide that TFC's
pre-tax earnings, before extraordinary items and fixed charges (including
interest on indebtedness and amortization of debt discount, "fixed charges"),
will not be less than 125% of the Company's fixed charges. No such payments
under the Support Agreement were required for the years ended 1999, 1998, or
1997, when TFC's fixed-charge coverage ratios (as defined) were 163%, 173%, and
171%, respectively. Textron also has agreed to maintain TFC's consolidated
shareholder's equity at an amount not less than $200 million. Pursuant to the
terms of the Support Agreement, Textron is required to directly or indirectly
own 100% of TFC's common stock. The Support Agreement also contains a
third-party beneficiary provision entitling TFC's creditors to enforce its
provisions against Textron.
Tax Sharing Agreement with Textron
TFC's revenues and expenses are included in the consolidated Federal tax
return of Textron. The Company files most of its State income tax returns on a
separate basis. TFC is allocated Federal tax benefits and charges on the basis
of statutory U.S. tax rates applied to the Company's taxable income or loss
included in the consolidated returns. The benefits of general business credits,
foreign tax credits, and any other tax credits are utilized in computing current
tax liability. TFC is paid for tax benefits generated and utilized in Textron's
consolidated Federal and State income tax returns, whether or not the Company
would have been able to utilize those benefits on a separate tax return. Income
tax assets or liabilities are settled on a quarterly basis.
Under a Tax Sharing Agreement with Textron, Textron has agreed to loan to
TFC, on a junior subordinated interest-free basis, an amount equal to Textron's
deferred income tax liability attributable to the manufacturing profit not yet
recognized for tax purposes on products manufactured by Textron and financed by
TFC. Borrowings under this arrangement are reflected in "Amounts due to Textron
Inc." in TFC's audited Consolidated Balance Sheet in Item 8 of this Form 10-K.
REGULATIONS
Small Business Act
SBA loans made by TFC are governed by the Small Business Act and the Small
Business Investment Act of 1958, as amended, and also may be subject to state
regulations relating to commercial transactions generally. These Federal and
State statutes and regulations specify the types of loans and loan amounts which
are eligible for the SBA's guarantee, as well as the servicing requirements
imposed on the lender to maintain the effectiveness of the SBA guarantees.
Other
TFC's activities are subject, in certain instances, to supervision and
regulation by State and Federal governmental authorities. These activities also
may be subject to various laws, including consumer finance
7
<PAGE> 9
laws in some instances, and judicial and administrative decisions imposing
various requirements and restrictions, which, among other things:
- Regulate credit granting activities;
- Establish maximum interest rates, finance charges, and other charges;
- Require disclosures to customers;
- Govern secured transactions;
- Affect insurance brokerage activities; and
- Set collection, foreclosure, repossession and claims handling procedures,
and other trade practices.
Although most states do not intensely regulate commercial finance activity,
many states impose limitations on interest rates and other charges, and prohibit
certain collection and recovery practices. They also may require licensing of
lenders or lessors, and specific disclosure of certain contract terms. TFC also
is required to comply with certain provisions of the Equal Credit Opportunity
Act. The Company also may be subject to regulation in those foreign countries in
which it has operations.
Existing statutes and regulations have not had a material adverse effect on
the Company's business. However, it is not possible to forecast the nature of
future legislation, regulations, judicial decisions, orders or interpretations,
or their impact upon TFC's future business, financial condition, results of
operations, or prospects.
EMPLOYEES
As of January 1, 2000, TFC had 1,039 employees. The Company is not subject
to any collective bargaining agreements.
RISK MANAGEMENT
TFC's business activities involve various elements of risk. The Company
considers the principal types of risk to be:
- Credit risk;
- Asset/liability risk (including interest rate and foreign exchange risk);
and
- Liquidity risk.
Proper management of these risks is essential to maintaining profitability.
Accordingly, the Company has designed risk management systems and procedures to
identify and quantify these risks. TFC has established appropriate policies and
set prudent limits in these areas. The Company's management of these risks, and
compliance with policies and limits, is continuously monitored by means of
administrative and information systems.
Credit Risk Management
TFC manages credit risk through:
- Underwriting procedures;
- Centralized approval of individual transactions exceeding certain size
limits; and
- Active portfolio and account management.
8
<PAGE> 10
The Company has developed underwriting procedures for each operating unit
that assess a prospective borrower's ability to perform in accordance with
proposed loan terms. These procedures include:
- Analyzing business or property cash flows and collateral values;
- Performing financing sensitivity analyses; and
- Assessing potential exit strategies.
TFC has developed a tiered credit approval system which allows certain
transaction types and sizes to be approved at the operating unit level. The
delegation of credit authority is done under strict policy guidelines. TFC
operating units also are subject to semi-annual audits by the Company's
Corporate Investment Control Department.
Depending on transaction size and complexity, transactions outside of
operating unit authority require the approval of a Group Investment Control
Officer, and one or more of the Executive Vice President and Chief Operating
Officer, the Executive Vice President and Chief Credit Officer, the Chairman,
President and Chief Executive Officer, or TFC's Credit Committee, which is
comprised of its Chairman, President and Chief Executive Officer, Executive Vice
President and Chief Operating Officer, Executive Vice President and Chief Credit
Officer, Executive Vice President and Chief Financial Officer, and Executive
Vice President, General Counsel and Secretary.
The Company controls the credit risk associated with its portfolio by
limiting transaction sizes, as well as diversifying transactions by: (1)
industry, (2) geographic area, (3) property type, and (4) borrower. Through
these practices, TFC identifies and limits exposure to unfavorable risks and
seeks favorable financing opportunities. Management reviews receivable aging
trends and watch list reports, and conducts regular business reviews, in order
to monitor portfolio performance. Certain receivable transactions are originated
with the intent of fully or partially selling them. This strategy provides an
additional tool to manage credit risk.
Geographic Concentration
TFC continuously monitors its portfolio to avoid any undue geographic
concentration in any region of the U.S. or in any foreign country. The largest
concentration of domestic receivables was in the Southeastern U.S., representing
26% of TFC's total owned and securitized portfolio at January 1, 2000.
International receivables are mostly generated in support of Textron product
sales. At January 1, 2000, international receivables represented 10% of TFC's
total owned and securitized portfolio, with no single country representing more
than 3%.
Asset/Liability Risk Management
The Company continuously measures and quantifies: (1) interest rate risk,
(2) foreign exchange risk, and (3) liquidity risk, in each case taking into
account the affect of derivatives hedging activity. TFC uses derivatives as an
integral part of its asset/liability management program, in order to reduce:
- Interest rate exposure arising from changes in interest rates; and
- Foreign currency exposure arising from changes in exchange rates.
The Company does not use derivative products for the purpose of generating
earnings from changes in market conditions. Before entering into a derivative
transaction, the Company determines that a high correlation exists between the
change in value of the hedged asset or liability and the value of the
derivative. When TFC executes a transaction, it designates the derivative to a
specific asset or liability. The risk that a derivative will become an
ineffective hedge is generally limited to the possibility that an asset or
liability being hedged will prepay before the related derivative matures.
Accordingly, after the inception of a hedge transaction, TFC monitors the
effectiveness of derivatives through an ongoing review of the amounts and
maturities of assets, liabilities, and derivative positions. This information is
reviewed by the Company's Vice President and Treasurer and Executive Vice
President and Chief Financial Officer so that appropriate remedial action can be
taken, as necessary.
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<PAGE> 11
TFC carefully manages exposure to counterparty risk in connection with its
derivatives transactions. In general, the Company engages in transactions with
counterparties having ratings of at least "A" by Standard & Poor's Rating
Service or "A2" by Moody's Investor Service. Total notional counterparty
exposure is limited to $500 million. This maximum notional exposure equates to
approximately $15 million of potential credit exposure (within two standard
deviations of probability) for the types of derivative transactions typically
entered into by TFC (e.g., interest rate swaps, basis swaps, and short-term
currency swaps and forward contracts).
Interest Rate Risk Management
TFC manages interest rate risk by monitoring the duration and interest rate
sensitivity of its assets, and by incurring liabilities (either directly or
synthetically with derivatives) having a similar duration and interest
sensitivity profile. The Company's internal policies limit the aggregate
mismatch of interest sensitive assets and liabilities to 10% of total assets.
From a quantitative perspective, TFC assesses its exposure to interest rate
changes using an analysis that measures the potential loss in net income, over a
12 month period, resulting from a hypothetical increase in interest rates of 100
basis points across all maturities occurring at the outset of the measurement
period (sometimes referred to as a "shock test"). The Company also assumes in
its analysis that: prospective receivables additions will be perfectly match
funded, existing portfolios will not prepay, and all other relevant factors will
remain constant. This "shock test" model, when applied to TFC's asset and
liability position at January 1, 2000, indicated no material effect on the
Company's net income for the following twelve-month period.
Foreign Exchange Risk Management
A small portion of finance assets owned by TFC are located outside of the
United States. These receivables are generally in support of Textron's overseas
product sales and are predominantly denominated in U.S. dollars. TFC presently
has foreign currency receivables denominated in Canadian and Australian dollars.
In order to minimize the effect of fluctuations in foreign currency exchange
rates in TFC's financial results, the Company borrows in these currencies and
enters into forward exchange contracts, on a monthly basis, in amounts
sufficient to hedge TFC's remaining asset exposure. As a result, TFC has no
material exposure to changes in foreign currency exchange rates.
Liquidity Risk Management
The Company uses cash to fund asset growth and to meet debt obligations and
other commitments. TFC's primary sources of funds are:
- Commercial paper borrowings;
- Issuances of medium-term notes and other term debt securities; and
- Syndication, securitization, and sale of receivables.
All commercial paper borrowings are fully backed by committed lines of
credit, providing liquidity in the event of capital market dislocation. The
Company generally maintains less than 50% of debt obligations in commercial
paper and short-term debt. If TFC is unable to access these markets on
acceptable terms, the Company can draw on its bank credit facilities and use
cash flow from operations and portfolio liquidations to satisfy its liquidity
needs. For additional information regarding TFC's liquidity risk management, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," in Item 7 of this Form 10-K.
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<PAGE> 12
PORTFOLIO QUALITY
The performance of TFC's portfolio reflects the Company's rigorous credit
approval process and disciplined portfolio management. At year-end 1999,
nonperforming assets, as a percentage of total finance assets, improved from
year-end 1998. At 1.8%, nonperforming assets ratio is below TFC's target range
of 2% to 4%.
The following table presents information about the credit quality of the
Company's portfolio:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------ ----- ----- ------ ------
(In millions)
<S> <C> <C> <C> <C> <C>
NONPERFORMING ASSETS
Nonaccrual finance receivables................ $ 83.6 $69.9 $85.6 $ 91.2 $ 98.7
Real estate owned............................. 8.5 11.6 10.6 17.9 27.1
Repossessed assets............................ 8.8 5.2 3.2 8.2 1.6
------ ----- ----- ------ ------
Total nonperforming assets............ $100.9 $86.7 $99.4 $117.3 $127.4
====== ===== ===== ====== ======
Ratio of nonaccrual finance receivables to total
finance receivables........................... 1.5% 1.9% 2.8% 2.9% 3.3%
Ratio of nonperforming assets to total finance
assets........................................ 1.8% 2.3% 3.1% 3.6% 4.1%
ALLOWANCE FOR LOSSES
Allowance for losses on receivables............. $112.8 $83.9 $77.4 $ 74.8 $ 74.8
Ratio of allowance for losses on receivables to
receivables................................... 2.0% 2.3% 2.5% 2.4% 2.5%
Ratio of allowance for losses on receivables to
net charge-offs............................... 4.8x 5.1x 4.0x 2.8x 3.3x
Ratio of allowance for losses on receivables to
nonperforming assets.......................... 111.8% 96.8% 77.9% 63.8% 58.7%
</TABLE>
Nonperforming Assets
Nonperforming assets include nonaccrual finance receivables and repossessed
assets. TFC classifies receivables as nonaccrual, and suspends the recognition
of earnings, when accounts are contractually delinquent by more than three
months, unless collection of principal and interest is not doubtful. In
addition, earlier suspension may occur if TFC has significant doubt about the
ability of the obligor to meet current contractual terms. Doubt may be created
by: (1) payment delinquency, (2) reduction in the obligor's cash flows, (3)
deterioration in the loan to collateral value relationship, or (4) other
relevant considerations.
The table below shows nonperforming assets by business segment:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------
1999 1998 1997
------ ----------- -----
(In millions)
<S> <C> <C> <C>
NONPERFORMING ASSETS BY SEGMENT
Term Loans and Leases..................................... $ 50.3 $34.0 $34.1
Revolving Credit.......................................... 21.2 4.5 5.8
Specialty Finance......................................... 12.3 10.0 0.9
Commercial Real Estate.................................... 17.1 38.2 58.6
------ ----- -----
Total nonperforming assets........................ $100.9 $86.7 $99.4
====== ===== =====
</TABLE>
The above table does not include captive receivables with recourse to
Textron. Captive receivables with recourse that were 90 days or more delinquent
amounted to 8.9%, 10.9%, and 9.7% of recourse captive finance receivables for
the years ended 1999, 1998, and 1997, respectively. Revenues recognized on these
delinquent accounts were approximately $7.0 million, $5.8 million, and $7.9
million for the years ended 1999, 1998, and 1997, respectively.
11
<PAGE> 13
Delinquent Earning Accounts and Loan Modifications
TFC does not have any earning accounts that are 90 days or more delinquent,
with the exception of the captive receivables described above. Loans that are
modified are not returned to accruing status until six months of timely payments
have been received, or TFC otherwise deems that full collection of principal and
interest is not doubtful.
Allowance for Losses
The allowance for losses on receivables is available to absorb losses in
the entire portfolio. TFC establishes this allowance through direct charges to
income. Losses are charged to the allowance when all or a portion of a
receivable is considered to be uncollectible. The Company reviews the allowance
periodically, and adjusts it in response to: (1) the size and loss experience of
the overall portfolio, (2) current economic conditions, and (3) the
collectibility and workout potential of identified nonperforming accounts.
Finance receivables are written down to the fair value of the related collateral
(less estimated cost to sell) when the collateral is repossessed or when no
payment has been received for six months. If the fair market value of
repossessed assets declines after the time of repossession, TFC records a
writedown to reflect this reduction in value.
ITEM 2. PROPERTIES
TFC leases office space from a Textron affiliate for its corporate
headquarters at 40 Westminster Street, Providence, Rhode Island 02903. The
Company leases other offices throughout the United States. For additional
information regarding TFC's lease obligations, see Note 13 to TFC's audited
Consolidated Financial Statements in Item 8 of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
For information regarding TFC's legal proceedings, see Note 14 to TFC's
audited Consolidated Financial Statements in Item 8 of this Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted per Instruction I of Form 10-K.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of TFC is owned entirely by Textron and, therefore, there
is no trading of TFC's stock. Dividends of $35.7 million were declared and paid
in 1999, and $62.3 million and $73.6 million were declared and paid in the years
ended 1998 and 1997, respectively. For additional information regarding
restrictions as to dividend availability, see Note 8 to TFC's audited
Consolidated Financial Statements in Item 8 of this Form 10-K.
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<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The following data should be read in conjunction with TFC's audited
Consolidated Financial Statements:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED(1)
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Finance charges and discounts........ $ 391,091 $ 297,091 $ 290,943 $ 281,830 $ 271,580
Rental revenues on operating
leases............................. 15,503 17,181 18,664 19,071 20,859
Other income......................... 56,309 52,890 40,613 26,346 18,777
Net income........................... 78,904 69,576 67,741 58,339 54,447
BALANCE SHEET DATA
Total finance receivables............ $5,599,896 $3,611,397 $3,069,123 $3,172,824 $2,967,569
Allowance for losses on
receivables........................ 112,769 83,887 77,394 74,824 74,769
Equipment on operating
leases -- net...................... 133,171 118,590 111,518 127,691 124,728
Total assets......................... 5,989,483 3,784,538 3,177,965 3,269,141 3,060,521
Commercial paper and short-term
debt............................... 1,339,021 1,424,872 1,073,665 1,014,613 1,009,761
Long-term debt....................... 3,211,737 1,403,958 1,290,903 1,426,783 1,266,911
Deferred income taxes................ 307,035 321,521 319,293 315,366 302,741
Mandatorily redeemable preferred
securities of subsidiary trust..... 28,539 -- -- -- --
Shareholder's equity................. 869,161 472,452 405,876 411,715 382,476
External debt to shareholder's
equity............................. 5.24X 5.99x 5.83x 5.93x 5.95x
SELECTED DATA AND RATIOS
PROFITABILITY
Net interest margin as a percentage
of average net investment(2)....... 6.27% 6.88% 6.51% 6.15% 5.98%
Return on average equity............. 14.1% 16.2% 16.8% 14.8% 14.8%
Return on average assets(3).......... 1.74% 2.06% 2.07% 1.84% 1.82%
Ratio of earnings to fixed charges... 1.63X 1.72x 1.70x 1.65x 1.60x
Selling and administrative expenses
as a percentage of average managed
receivables(4)..................... 1.71% 1.73% 1.54% 1.65% 1.59%
Operating efficiency ratio(5)........ 35.4% 33.8% 29.3% 27.8% 27.6%
CREDIT QUALITY
60+ days contractual delinquency as a
percentage of finance
receivables(6)..................... 0.96% 0.87% 0.86% 0.75% 2.52%
Nonperforming assets as a percentage
of finance assets.................. 1.8% 2.3% 3.1% 3.6% 4.1%
Reserves for losses as a percentage
of finance receivables............. 2.0% 2.3% 2.5% 2.4% 2.5%
</TABLE>
- ---------------
(1) TFC's year-end dates conform with Textron's year-end, which falls on the
nearest Saturday to December 31.
(2) Represents revenues earned less interest expense on borrowings as a
percentage of average net investment. Average net investment includes
finance receivables plus operating leases less deferred taxes on leveraged
leases.
(3) Average assets include finance receivables, less allowance for loan losses,
operating leases and other assets. Investments in leveraged leases are not
net of deferred taxes.
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<PAGE> 15
(4) Average managed receivables include owned receivables plus receivables
serviced under securitizations, participations and third-party portfolio
servicing agreements.
(5) Operating efficiency ratio is selling and administrative expenses divided by
net interest margin (including other income).
(6) Delinquency excludes captive receivables with recourse to Textron. Captive
receivables represent third-party finance receivables originated in
connection with the sale or lease of Textron manufactured products.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
Liquidity and Capital Resources
TFC utilizes a broad base of financial resources for its liquidity and
capital requirements. Cash is provided from operations and several different
sources of borrowings, including the issuance of commercial paper and short-term
debt, sales of medium- and long-term debt in the U.S. and foreign financial
markets and junior subordinated borrowings under a $100 million line of credit
with Textron. For liquidity purposes, TFC has a policy of maintaining sufficient
unused lines of credit to support its outstanding commercial paper. TFC has bank
line of credit agreements of $1.2 billion, of which $400 million will expire in
2000 and $800 million will expire in 2003. While none of TFC's total lines of
credit were used, those not reserved as support for commercial paper were $296
million at January 1, 2000, as compared to $114 million at January 2, 1999.
In the first half of 1999, TFC entered into a short-term promissory note
program with Textron at market rates of interest. As of June 30, 1999, TFC had
no borrowings under this program and the program was cancelled.
At January 1, 2000, TFC had a medium-term note facility, totaling $2.05
billion, under Rule 144A of the Securities Act of 1933, as amended. Original
maturities range from nine months to five years. Proceeds from issuances under
this facility have been used to refinance maturing commercial paper and
long-term debt and to fund receivable growth. During 1999, TFC issued $683
million of fixed rate notes and $882 million of variable rate notes through this
facility. At January 1, 2000, TFC had $115 million available through this
medium-term note facility.
During the fourth quarter of 1999, TFC filed a Form S-3 registration
statement with the Securities and Exchange Commission. Under this shelf
registration, TFC may issue public debt securities in one or more offerings up
to a total maximum offering of $3 billion. In December 1999, TFC issued $600
million of five-year, fixed rate notes and $400 million of three-year, variable
rate notes under this facility, the proceeds of which were used to refinance
maturing commercial paper and long-term debt. At January 1, 2000, TFC had $2
billion available under this facility.
Cash flows provided by operations were $144 million in both 1999 and 1998.
An increase of 17% in income before provision for losses, less a gain on the
sale of an investment, was offset by the payment of accrued interest and other
liabilities and an increase in other assets. Cash flows from operations of $144
million in 1998 were $51 million higher than in 1997. The increase from 1997 was
primarily due to the timing of payments of income taxes and accrued interest and
other liabilities, and included increases in payables for receivable additions
originated in late December of 1998.
Cash flows used in investing activities in 1999 were funded from the
collection of receivables and through the issuance of long-term debt. TFC
acquired four businesses in 1999 and two businesses in 1998 for an aggregate
purchase price of $715 million and $203 million, respectively, net of cash
acquired.
Short-term borrowings decreased by $86 million in 1999, as compared to an
increase of $351 million in the prior year. The decrease in 1999 reflected the
refinancing of short-term borrowings with long-term debt, while the increase in
1998 reflected the financing of acquisitions and receivable growth. Long-term
debt increased by $1,808 million and $113 million in 1999 and 1998,
respectively, due to the financing of receivable growth, including acquisitions,
and the refinancing of short-term borrowings.
14
<PAGE> 16
In 1999, TFC paid dividends to Textron of $35.7 million, as compared to
$62.3 million in 1998. The decrease was primarily due to the retention of
earnings to support receivable growth. Capital contributions from Textron,
primarily in support of acquisitions, were $353.5 million and $59.3 million in
1999 and 1998, respectively.
Because the finance business involves the purchase and carrying of
receivables, a relatively high ratio of borrowings to net worth is customary.
Debt as a percentage of total capitalization was 84% at January 1, 2000 as
compared to 86% at January 2, 1999. The decrease reflects the effect of the
increased Textron capital contributions during 1999.
TFC's ratio of earnings to fixed charges was 1.63x in 1999 (1.72x in 1998
and 1.70x in 1997). Commercial paper and short-term debt as a percentage of
total debt was 29% at January 1, 2000, as compared to 50% at January 2, 1999.
The decrease reflected management's decision in 1999 to limit commercial paper
and short-term debt at year-end to reduce exposure to illiquidity and interest
rate volatility. In 1998, the percentage of commercial paper and short-term debt
reflected short-term financing for an equipment portfolio acquired on December
31, 1998. The Company believes that it has adequate credit facilities and access
to credit markets to meet its long term financing needs.
Finance Receivables
TFC's portfolio includes a wide variety of secured loans and leases to
business organizations located primarily in the United States. Management
believes that the portfolio avoids excessive concentration of risk through
diversification across geographic regions, industries, types of collateral and
among borrowers.
Total finance receivables were $5.6 billion at January 1, 2000, up 55% from
$3.6 billion at January 2, 1999. The increase in receivables was related to
growth in all three of TFC's active business segments. Growth in the Term Loans
and Leases segment was $768 million or 38%. The increase reflected strong growth
in the golf finance and aircraft finance portfolios and two business
acquisitions in the equipment finance and aircraft finance portfolios. The
Specialty Finance segment increased by $993 million or 137% primarily due to
business acquisitions in the receivables and franchise finance portfolios and,
to a lesser degree, portfolio growth in receivables finance (24%), structured
finance (16%), and the start-up of a broadcast media finance portfolio. The
Revolving Credit segment increased by $246 million or 30%. Asset-based lending
and factoring, and floorplan finance grew 17%, exclusive of 13% growth resulting
from an acquisition of a factoring company. Managed receivables, defined as
owned receivables plus receivables serviced under securitizations,
participations, and third-party portfolio servicing agreements, increased by
$2.3 billion, or 51%, to $6.8 billion at January 1, 2000, as compared to $4.5
billion at the end of 1998.
Finance receivable additions for 1999 were $4.9 billion, as compared to
$4.1 billion of additions in 1998. The increase in additions was due to growth
in all three active business segments, with 49% of the increase in Specialty
Finance.
Nonperforming Assets
Nonperforming assets as a percentage of finance assets declined from 2.3%
at January 2, 1999 to 1.8% at January 1, 2000. Nonperforming assets were $101
million at January 1, 2000, as compared to $87 million at January 2, 1999. The
increases in nonperforming aircraft finance, golf finance, and asset-based
lending and factoring assets were offset by decreases in nonperforming real
estate and equipment assets.
The allowance for losses on receivables as a percentage of nonperforming
assets increased to 112% at January 1, 2000, from 97% at January 2, 1999. The
increase in the allowance for loan losses was consistent with growth in various
receivable portfolios, while nonperforming assets decreased as a percentage of
total assets.
Interest Rate Sensitivity
The Company's mix of fixed and floating rate debt is continuously monitored
by management and is adjusted, as necessary, based on evaluation of internal and
external factors.
15
<PAGE> 17
Management's strategy of matching interest-sensitive assets with
interest-sensitive liabilities limits the Company's risk to changes in interest
rates and includes entering into interest rate exchange agreements as part of
this matching strategy. At January 1, 2000, TFC's interest-sensitive liabilities
in excess of interest-sensitive assets were $45 million, net of $300 million of
fixed rate interest rate exchange agreements. Interest-sensitive liabilities in
excess of interest-sensitive assets were $463 million at January 2, 1999, net of
$300 million of interest rate exchange agreements ($250 million fixed rate and
$50 million variable rate). The change in the Company's net position reflects
the acquisition of a fixed rate equipment portfolio on December 31, 1998, that
was funded with a variable rate short-term note and subsequently refinanced
during the first quarter of 1999, and does not reflect a change in management's
match funding strategy. Management believes that its asset management policy
provides adequate protection against interest rate risks. Increases in interest
rates, however, could have an adverse effect on interest margin. Variable rate
receivables are generally tied to changes in the prime rate offered by major
U.S. banks or LIBOR. Increases in short-term borrowing costs generally precede
increases in variable rate receivable yields. From a quantitative perspective,
TFC assesses its exposure to interest rate changes using an analysis that
measures the potential loss in net income, over a 12 month period, resulting
from a hypothetical increase in interest rates of 100 basis points across all
maturities occurring at the outset of the measurement period (sometimes referred
to as a "shock test"). The Company also assumes in its analysis that:
prospective receivables additions will be match funded, existing portfolios will
not prepay, and all other relevant factors will remain constant. This "shock
test" model, when applied to TFC's asset and liability position at January 1,
2000, and January 2, 1999, indicated no material effect on the Company's net
income for the following twelve-month periods.
Financial Risk Management
TFC's results are affected by changes in U.S. and foreign interest rates.
As part of managing this risk, TFC enters into interest rate exchange
agreements. The objective of TFC's use of such agreements is not to speculate
for profit, but generally to convert variable rate debt into fixed rate debt and
vice versa. The overall objective of TFC's interest rate risk management is to
achieve a prudent balance between floating and fixed rate debt. Of the $300
million of interest rate exchange agreements in effect at January 1, 2000, and
January 2, 1999, $300 million and $250 million, respectively, converted variable
rate debt to fixed rate debt and the remaining $50 million at January 2, 1999,
converted fixed rate debt to variable rate debt. These agreements do not involve
a high degree of complexity or risk. TFC does not trade in interest rate
exchange agreements or enter into leveraged interest rate exchange agreements.
The net effect of these agreements increased TFC's interest expense by $1.8
million, $1.4 million, and $1.2 million in 1999, 1998 and 1997, respectively.
TFC has also entered into a $125 million interest rate exchange agreement
involving prime-based payments and LIBOR-based receipts. The objective of this
interest rate exchange agreement is to lock in desired spreads between floating
rate receivables indexed to the prime rate and floating rate liabilities indexed
to LIBOR.
TFC manages its foreign currency exposure by funding most foreign currency
denominated assets with liabilities in the same currency. In addition, as part
of managing its foreign currency exposure, TFC enters into foreign currency
forward exchange contracts. The objective of such agreements is to manage any
remaining exposure to changes in currency rates. The notional amounts of
outstanding foreign exchange contracts in 1999 and 1998 are not material.
RESULTS OF OPERATIONS
1999 VS. 1998
Revenues
Total revenues in 1999 increased $96 million from 1998, to $463 million,
reflecting a higher level of average finance receivables and higher other
income, partially offset by a decrease in yields on finance receivables.
Approximately $56 million of the revenue increase was attributable to the
Company's four 1999 acquisitions and an acquisition consummated on December 31,
1998.
16
<PAGE> 18
Finance charge revenues increased 32% in 1999, as compared to a 2% increase
in 1998. The 1999 results reflect a 36% higher level of average finance
receivables, partially offset by a lower yield of 9.7%, as compared to 10.0% in
1998. Rental revenue from operating leases in 1999 was $16 million, down from
$17 million in 1998 on lower average operating lease assets of 9% in 1999. Other
income of $56 million in 1999 increased by $3 million from 1998, reflecting
higher syndication fees, insurance fees, late charges, and servicing fees,
partially offset by lower residual gains and prepayment income. In addition,
1999 results included a gain of $4.7 million on the sale of an investment in the
third quarter, while third quarter 1998 results included a gain of $3.4 million
on the securitization of Textron-related receivables.
Interest Expense
Interest expense of $204 million in 1999 increased 31%, or $49 million,
from 1998, reflecting a 39% increase in average debt outstanding, partially
offset by a decrease in the cost of borrowed funds. Approximately $34 million of
the interest expense increase was attributable to the Company's four 1999
acquisitions and an acquisition consummated on December 31, 1998. TFC's average
borrowing rate was 5.9% in 1999 as compared to 6.2% in 1998. The decrease in
1999 reflected a reduction in short-term borrowing rates during much of the
year, partially offset by an increase in the borrowing rate for long-term fixed
rate debt.
Interest Margin
TFC's earnings are influenced by the interest margin earned on finance
receivables (i.e., the excess of revenues over interest expense on borrowings).
Interest margin decreased to 6.27% in 1999 from 6.88% in 1998, primarily due to
lower fee income as a percentage of average net receivables, reflecting lower
prepayment income and residual gains. To a lesser extent, the 1999 interest
margin also reflected lower variable rate yields, partially offset by lower
borrowing costs.
Operating Expenses
Selling and administrative expenses of $92 million in 1999 increased by $20
million from 1998. The increase in 1999 principally reflects higher expenses
related to acquisitions and growth in managed receivables. Selling and
administrative expenses as a percentage of average managed receivables remained
unchanged in 1999 at 1.7%.
Provision for Losses
The provision for losses of $32 million in 1999 increased from $20 million
in 1998. The increase in the 1999 provision for losses reflects receivable
growth and higher net charge-offs. Net charge-offs were $24 million in 1999, as
compared to $16 million in 1998. Net charge-offs related to asset-based lending
and factoring increased to $5 million in 1999, as compared to $0 in 1998.
Aircraft finance related charge-offs increased to $2 million in 1999, as
compared to a $1 million net recovery of previously charged off aircraft in
1998. Equipment related charge-offs increased to $12 million, as compared to $11
million in 1998. Commercial real estate net charge-offs were $2 million in 1999,
down from $5 million in 1998.
The allowance for losses on receivables was $113 million at January 1, 2000
and $84 million at January 2, 1999. The increase was primarily related to
portfolio growth and acquisitions. The allowance for losses as a percent of
receivables was 2.0% at January 1, 2000 and 2.3% at January 2, 1999 (2.4% and
2.7% excluding receivables with recourse to Textron in 1999 and 1998,
respectively).
Although management believes it has made adequate provision for anticipated
losses, realization of these assets remains subject to uncertainties. Subsequent
evaluations of nonperforming assets, in light of factors then prevailing,
including economic conditions, may require additional increases in the allowance
for losses for such assets.
17
<PAGE> 19
Net Income
Net income increased by 13% to $79 million in 1999. Net income was
favorably affected by higher average managed finance receivables, higher other
income, and lower borrowing costs, partially offset by lower portfolio yields,
higher selling and administrative costs, and a higher provision for losses.
1998 VS. 1997
Revenues
Total revenues in 1998 increased $17 million from 1997, to $367 million,
reflecting a higher level of average finance receivables and higher other
income.
Finance charge revenues of $297 million increased by 2% in 1998, as
compared to a 3% increase in 1997. The 1998 results reflect a 2% higher level of
average finance receivables while yields remained constant at 10.0%. Rental
revenue from operating leases in 1998 was $17 million, down from $19 million in
1997, on lower average operating lease assets of 3%. Other income of $53 million
in 1998 increased by $12 million from 1997, reflecting higher syndication fees,
residual income, servicing fees and prepayment income. Both years included a
gain of approximately $3 million on the securitization of Textron-related
receivables.
Interest Expense
Interest expense of $155 million in 1998 increased 1%, or $2 million, from
1997, reflecting a 2% increase in average debt outstanding, partially offset by
a decrease in the cost of borrowed funds. TFC's average borrowing rate was 6.2%
in 1998 and 6.3% in 1997. The decrease in 1998 reflected a reduction in
long-term variable rate debt costs.
Interest Margin
TFC's earnings are influenced by the interest margin earned on finance
receivables (i.e., the excess of revenues over interest expense on borrowings).
Interest margin increased to 6.88% in 1998 from 6.51% in 1997, primarily
reflecting higher other income and a lower average borrowing rate.
Operating Expenses
Selling and administrative expenses of $72 million in 1998 increased by $14
million from 1997. The increase principally reflected higher expenses related to
an acquisition of a receivable factoring company, growth in managed receivables,
and growth in businesses with higher operating expenses. Selling and
administrative expenses as a percentage of average managed receivables increased
to 1.7% from 1.5% in 1997.
Provision for Losses
The provision for losses of $20 million in 1998 decreased by $3 million
from $23 million in 1997. The decrease reflected lower real estate charge-offs,
higher recoveries of previously charged off aircraft and equipment loans and
lower nonperforming assets.
The allowance for losses on receivables was $84 million at January 2, 1999
and $77 million at January 3, 1998. The increase was primarily related to
portfolio growth. Net charge-offs were $16 million in 1998 as compared to $20
million in 1997. Net charge-offs related to commercial real estate were $5
million in 1998, down from $6 million in 1997. Equipment related charge-offs
decreased to $11 million in 1998, as compared to $14 million in 1997. The
allowance for losses as a percent of receivables was 2.3% at January 2, 1999 and
2.5% at January 3, 1998 (2.7% and 3.0% excluding receivables with recourse to
Textron in 1998 and 1997, respectively).
18
<PAGE> 20
Net Income
Net income increased by 3% in 1998, to $70 million, and was favorably
affected by an increase in other income, higher average managed finance
receivables, a lower provision for losses, and lower borrowing costs, partially
offset by higher selling and administrative expenses and a higher effective
income tax rate.
Year 2000 Disclosure
In early 1997, TFC began a company-wide program (the "Program") to assess
the possible vulnerability of TFC to the Year 2000 problem and to minimize the
effect of the problem on TFC's operations. The Program was centrally directed
from the Year 2000 Program Office at Textron's corporate headquarters and was
executed at TFC. As of January 1, 2000, the Program was complete for all systems
critical to TFC's operations. Subsequent to January 1, 2000, there have been no
system failures or significant incidents reported at any TFC location.
The total cost of the Year 2000 Program was $7.7 million. Approximately
$1.2 million was for modifications of existing systems and other program
expenses, and $6.5 million was for replacement systems, which have been
capitalized in accordance with Company policy. Funds for the Program were
provided through special project appropriations from normal operating and
capital budgets. The Year 2000 Program delayed certain other TFC information
management projects. However, the delay has not had an adverse impact on TFC.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires an entity
to recognize all derivatives as either assets or liabilities and measure those
instruments at fair value. SFAS No. 133 was scheduled to become effective for
all fiscal quarters beginning after June 15, 1999. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," which
defers for one year the effective date of SFAS No. 133. TFC is evaluating the
potential impact of SFAS No. 133 on future reporting.
Forward-looking Statements
Certain statements in this Annual Report and other oral and written
statements made by TFC from time to time, are forward-looking statements,
including those that discuss strategies, goals, outlook or other nonhistorical
matters; or project revenues, income, returns or other financial measures. These
forward-looking statements are subject to risks and uncertainties that may cause
actual results to differ materially from those contained in the statements,
including: (a) the extent to which TFC is able to successfully integrate
acquisitions; (b) changes in worldwide economic and political conditions and
associated impact on interest and foreign exchange rates; (c) the level of sales
of Textron products for which TFC offers financing; (d) the ability to maintain
credit quality and control costs when entering new markets; (e) the actions of
our competitors and our ability to respond; (f) our ability to attract and
retain qualified and experienced personnel; (g) TFC's access to debt financing
at competitive rates; and (h) access to equity in the form of retained earnings
and capital contributions from Textron.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For information regarding TFC's Quantitative and Qualitative Disclosure
about Market Risk, see "Risk Management" in Item 1 of this Form 10-K.
19
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Textron Financial Corporation
We have audited the accompanying consolidated balance sheet of Textron
Financial Corporation as of January 1, 2000 and January 2, 1999, and the related
consolidated statements of income, cash flows, and changes in shareholder's
equity for each of the three years in the period ended January 1, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Textron
Financial Corporation at January 1, 2000 and January 2, 1999, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended January 1, 2000, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Boston, Massachusetts
January 25, 2000
20
<PAGE> 22
CONSOLIDATED STATEMENT OF INCOME
For each of the three years in the period ended January 1, 2000
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
REVENUES
Finance charges and discounts.............................. $391,091 $297,091 $290,943
Rental revenues on operating leases........................ 15,503 17,181 18,664
Other income............................................... 56,309 52,890 40,613
-------- -------- --------
462,903 367,162 350,220
EXPENSES
Interest................................................... 203,817 155,126 153,127
Selling and administrative................................. 91,620 71,587 57,757
Provision for losses....................................... 32,067 20,483 22,824
Depreciation of equipment on operating leases.............. 6,867 7,340 8,433
-------- -------- --------
334,371 254,536 242,141
-------- -------- --------
INCOME BEFORE INCOME TAXES AND DISTRIBUTIONS ON PREFERRED
SECURITIES............................................... 128,532 112,626 108,079
Income taxes............................................... 49,385 43,050 40,338
Distributions on preferred securities (net of tax benefit
of $153)................................................. 243 -- --
-------- -------- --------
NET INCOME................................................. $ 78,904 $ 69,576 $ 67,741
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 23
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
2000 1999
---------- ----------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and equivalents........................................ $ 17,379 $ 22,396
Finance receivables, net of unearned income:
Installment contracts..................................... 2,137,266 1,338,644
Revolving loans........................................... 1,400,063 555,571
Floorplan receivables..................................... 657,079 572,289
Golf course and resort mortgages.......................... 535,382 342,844
Finance leases............................................ 509,413 424,436
Leveraged leases.......................................... 347,861 345,873
Commercial real estate mortgages.......................... 12,832 31,740
---------- ----------
Total finance receivables......................... 5,599,896 3,611,397
Allowance for losses on receivables......................... (112,769) (83,887)
---------- ----------
Finance receivables -- net........................ 5,487,127 3,527,510
Equipment on operating leases -- net........................ 133,171 118,590
Other assets................................................ 351,806 116,042
---------- ----------
Total assets...................................... $5,989,483 $3,784,538
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES
Accrued interest and other liabilities...................... $ 215,925 $ 143,316
Amounts due to Textron Inc.................................. 18,065 18,419
Deferred income taxes....................................... 307,035 321,521
Debt........................................................ 4,550,758 2,828,830
---------- ----------
Total liabilities................................. 5,091,783 3,312,086
---------- ----------
Mandatorily redeemable preferred securities of subsidiary
trust holding debentures of Litchfield Financial
Services.................................................. 28,539 --
SHAREHOLDER'S EQUITY
Common stock, $100 par value
(4,000 shares authorized; 2,500 shares issued and
outstanding).............................................. 250 250
Capital surplus............................................. 508,676 155,171
Retained earnings........................................... 360,235 317,031
---------- ----------
Total shareholder's equity........................ 869,161 472,452
---------- ----------
Total liabilities and shareholder's equity........ $5,989,483 $3,784,538
========== ==========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 24
CONSOLIDATED STATEMENT OF CASH FLOWS
For each of the three years in the period ended January 1, 2000
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 78,904 $ 69,576 $ 67,741
Adjustments to reconcile net income to net cash
Provided by operating activities:
Provision for losses.............................. 32,067 20,483 22,824
Increase (decrease) in accrued interest and other
liabilities.................................... 28,249 42,209 (4,901)
Depreciation and amortization..................... 19,417 13,716 11,221
Leveraged lease noncash earnings.................. (3,588) (7,646) (5,162)
Increase (decrease) in deferred income taxes...... (4,558) 2,228 3,927
Gain on sale of investment........................ (4,710) -- --
Gain on receivables securitization................ -- (3,400) (3,500)
Other............................................. (1,807) 7,141 462
----------- ----------- -----------
Net cash provided by operating
activities.............................. 143,974 144,307 92,612
CASH FLOWS FROM INVESTING ACTIVITIES:
Finance receivables originated or purchased......... (4,920,185) (4,069,256) (2,711,680)
Finance receivables repaid or sold.................. 4,090,220 3,458,873 2,444,301
Proceeds from receivables securitization............ -- 259,577 373,046
Acquisitions, net of cash acquired.................. (714,942) (203,203) --
Purchase of assets for operating leases............. (62,579) (36,840) (38,073)
Proceeds from disposition of operating lease and
other assets...................................... 43,737 25,892 45,409
Net proceeds from sale of investment................ 4,501 -- --
Other capital expenditures.......................... (11,025) (12,948) (7,443)
Proceeds from real estate owned..................... 3,503 2,028 5,460
Other investments................................... (10,053) (5,997) --
----------- ----------- -----------
Net cash provided by (used in) investing
activities.............................. (1,576,823) (581,874) 111,020
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt............ 2,345,013 370,000 200,000
Principal payments on long-term debt................ (1,056,392) (304,311) (335,880)
Net increase (decrease) in commercial paper......... (181,391) 188,176 23,313
Net increase in short-term debt..................... 95,540 163,031 35,739
Proceeds from issuance of nonrecourse debt.......... 51,286 60,404 --
Principal payments on nonrecourse debt.............. (143,675) (39,937) (38,938)
Net increase (decrease) in amounts due to Textron
Inc. ............................................. (354) 12,003 (7,744)
Capital contributions from Textron Inc. ............ 353,505 59,300 --
Dividends paid to Textron Inc....................... (35,700) (62,300) (73,580)
----------- ----------- -----------
Net cash provided by (used in) financing
activities.............................. 1,427,832 446,366 (197,090)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH..................... (5,017) 8,799 6,542
Cash and equivalents at beginning of year........... 22,396 13,597 7,055
----------- ----------- -----------
Cash and equivalents at end of year................. $ 17,379 $ 22,396 $ 13,597
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 25
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
For each of the three years in the period ended January 1, 2000
<TABLE>
<CAPTION>
COMMON CAPITAL RETAINED
STOCK SURPLUS EARNINGS TOTAL
------ -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
BALANCE DECEMBER 28, 1996........................ $250 $ 95,871 $315,594 $411,715
Net income....................................... -- -- 67,741 67,741
Dividends to Textron Inc......................... -- -- (73,580) (73,580)
---- -------- -------- --------
BALANCE JANUARY 3, 1998.......................... 250 95,871 309,755 405,876
Net income....................................... -- -- 69,576 69,576
Capital contributions from Textron Inc........... -- 59,300 -- 59,300
Dividends to Textron Inc......................... -- -- (62,300) (62,300)
---- -------- -------- --------
BALANCE JANUARY 2, 1999.......................... 250 155,171 317,031 472,452
NET INCOME....................................... -- -- 78,904 78,904
CAPITAL CONTRIBUTIONS FROM TEXTRON INC........... -- 353,505 -- 353,505
DIVIDENDS TO TEXTRON INC. ....................... -- -- (35,700) (35,700)
---- -------- -------- --------
BALANCE JANUARY 1, 2000.......................... $250 $508,676 $360,235 $869,161
==== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Textron Financial Corporation (TFC or the Company) is a diversified
commercial finance company offering specialized lending in three active business
segments: Term Loans and Leases, Revolving Credit and Specialty Finance. TFC
originates financing transactions for numerous industries, including aircraft,
golf and timeshare resorts. TFC's other financial services and products include
syndications, portfolio servicing, asset management and insurance brokerage. TFC
is a subsidiary of Textron Inc. (Textron), an $11.6 billion global,
multi-industry company with market-leading businesses in Aircraft, Automotive,
Industrial and Finance. At January 1, 2000, 21% of TFC's total managed finance
receivables were related to Textron or Textron's products. TFC's principal
markets are located in North America. However, the Company finances Textron
manufactured products worldwide, principally Bell helicopters and Cessna
aircraft. TFC's year-end dates conform with Textron's year-end, which falls on
the nearest Saturday to December 31.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
TFC and its subsidiaries, all of which are wholly-owned. All significant
intercompany transactions are eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in those statements and
accompanying notes. Actual results may differ from such estimates.
Finance Charges and Discounts and Investment Tax Credits
Finance charges and discounts include interest on loans, capital lease
earnings and discounts on certain revolving credit arrangements. Finance charges
and investment tax credits are recognized in finance charge revenues using the
interest method to produce a constant rate of return over the terms of the
receivables. Accrual of interest income is suspended for accounts which are
contractually delinquent by more than three months, unless collection is not
doubtful. In addition, detailed reviews of loans may result in earlier
suspension if collection is doubtful. Accrual of interest is resumed when the
loan becomes contractually current, and suspended interest income is recognized
at that time.
Other Income
Other income includes late charges, prepayment penalties, residual gains
and other miscellaneous fees which are primarily recognized as income when
received.
Other income also includes syndication gains on the sale of loans and
leases. Syndication gains (excluding securitizations) were $13.6 million, $9.9
million and $9.3 million in 1999, 1998 and 1997, respectively. In some
circumstances, the Company sells or securitizes loans and leases and retains
interest-only strips, subordinated tranches, servicing rights and cash reserve
accounts. Gain or loss on sale depends in part on the previous carrying amount
of retained interests, allocated in proportion to the fair value of the amounts
sold and retained. Subsequent to the sales, certain retained interests are
carried at fair value. The Company generally estimates fair value based on the
present value of future cash flows expected under management's best estimates of
the key assumptions -- credit losses, prepayment speeds, forward yield curves
and discount rates commensurate with the risks involved.
25
<PAGE> 27
Finance Receivable Origination Fees and Costs
Fees received and direct loan origination costs are deferred and amortized
to finance charge revenues over the contractual lives of the respective
receivables using the interest method. Unamortized amounts are recognized in
revenues when receivables are sold or paid in full.
Allowance for Losses on Receivables
Provisions for losses on finance receivables are charged to income in
amounts sufficient to maintain the allowance at a level considered adequate to
cover losses in the existing receivable portfolio. Management evaluates the
allowance by examining current delinquencies, the characteristics of the
existing accounts, historical loss experience, the value of the underlying
collateral and general economic conditions and trends.
Finance receivables are written off when they are deemed uncollectible.
Finance receivables are written down to the fair value (less estimated costs to
sell) of the related collateral when the collateral is repossessed or when no
payment has been received for six months, unless management deems the receivable
collectible.
Loan Impairment
Reserves relating to nonperforming assets, which assets are expected to be
recovered through future cash payments, were established based on the present
value of those cash flows discounted at the original interest rate of the loan.
Reserves for collaterally dependent loans are established to provide for the
difference between the estimated fair value, less cost to sell, and the loan
balance.
Equipment on Operating Leases
Income from operating leases is recognized in equal amounts over the lease
term. The cost of such assets is capitalized and depreciated to estimated
residual values using the straight-line method over the estimated useful lives
of the assets or the lease term.
Intangible Assets
TFC amortizes the excess of cost over the fair value of net assets acquired
("goodwill") on a straight-line basis over periods ranging from 10 to 25 years.
Goodwill at January 1, 2000, and January 2, 1999, was $211.4 million and $27.1
million, net of accumulated amortization of $4.0 million and $0.6 million,
respectively. Amortization totaled $3.4 million, $0.6 million and $0 for the
years ended 1999, 1998 and 1997, respectively. At January 1, 2000, approximately
$53.8 million of goodwill (net of accumulated amortization) was deductible for
federal income tax purposes over 15 years under Section 197 of the Internal
Revenue Code.
Certain other identified intangible assets are being amortized over periods
ranging from five to six years. TFC periodically evaluates the carrying value of
its intangible assets for impairment to determine if a write-down to fair value
is necessary. This evaluation is based on projected, undiscounted cash flows
generated by the underlying assets.
Pension Benefits and Postretirement Benefits Other than Pensions
TFC participates in Textron's defined contribution and defined benefit
pension plans. The cost of the defined contribution plan amounted to
approximately $0.9 million, $0.8 million and $0.7 million in 1999, 1998 and
1997, respectively. The cost of the defined benefit pension plan amounted to
approximately $2.6 million, $1.2 million and $0.9 million in 1999, 1998 and
1997, respectively. Defined benefits under salaried plans are based on salary
and years of service. Textron's funding policy is consistent with federal law
and regulations. Pension plan assets consist principally of corporate and
government bonds and common stocks. Accrued pension expense is included in
accrued interest and other liabilities on TFC's consolidated balance sheet.
26
<PAGE> 28
Foreign Currency Exchange Contracts
TFC has entered into foreign currency exchange contracts to minimize its
currency exchange risk on its foreign currency receivables and debt. Gains and
losses on foreign currency exchange contracts that hedge foreign currency
receivables and debt are recognized in income as the exchange rates change and
offset foreign currency gains and losses on the foreign currency receivables and
debt. While TFC is exposed to credit loss in the event of nonperformance by the
counterparties to the contracts, TFC does not anticipate nonperformance by any
of those parties. TFC had minimal exposure to loss from nonperformance by the
counterparties to these agreements at the end of 1999. Foreign currency exchange
gains and losses in 1999, 1998 and 1997 were not material.
Interest Rate Exchange Agreements
As part of managing interest rate exposure on its variable interest rate
borrowings, TFC is a party to various interest rate exchange agreements. While
TFC is exposed to credit loss for the periodic settlement of amounts due under
such agreements in the event of nonperformance by the counterparties, TFC does
not anticipate nonperformance by any of those parties. TFC currently minimizes
this potential for risk by entering into contracts exclusively with major,
financially sound counterparties having no less than a long-term bond rating of
a middle "A," by continuously monitoring the counterparties' credit ratings and
by limiting exposure with any one financial institution. TFC had minimal
exposure to loss from nonperformance by the counterparties to these agreements
at the end of 1999.
Interest differentials to be paid or received are accrued and recognized in
interest expense over the lives of the agreements.
Fees and expenses incurred to enter into interest rate exchange agreements
are deferred and subsequently amortized to expense over the terms of the
agreements.
Income Taxes
TFC's revenues and expenses are included in Textron's consolidated tax
return. Current tax expense is based on allocated federal tax charges and
benefits on the basis of statutory U.S. tax rates applied to the Company's
taxable income or loss included in Textron's consolidated returns.
Deferred income taxes are recognized for temporary differences between the
financial reporting basis and income tax basis of assets and liabilities, based
on enacted tax rates expected to be in effect when such amounts are expected to
be realized or settled.
Fair Value of Financial Instruments
Fair values of financial instruments are based upon estimates at a specific
point in time using available market information and appropriate valuation
methodologies. These estimates are subjective in nature and involve
uncertainties and significant judgment in the interpretation of current market
data. Therefore, the fair values presented are not necessarily indicative of
amounts TFC could realize or settle currently. TFC does not necessarily intend
to dispose of or liquidate such instruments prior to maturity.
Cash and Equivalents
Cash and equivalents consist of cash in banks and overnight
interest-bearing deposits in banks.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
NOTE 2 RELATIONSHIP WITH TEXTRON INC.
TFC is a wholly-owned subsidiary of Textron and derives a portion of its
business from financing the sale and lease of products manufactured and sold by
Textron. TFC recognized finance charge revenues from
27
<PAGE> 29
Textron and affiliates (net of payments or reimbursements for interest charged
at more or less than market rates on Textron manufactured products) of $7.2
million in 1999, $3.7 million in 1998, $0.1 million in 1997, and operating lease
revenues of $9.5 million in 1999, $10.8 million in 1998, $13.3 million in 1997.
In 1999, 1998 and 1997, TFC paid Textron $1,260.0 million, $980.4 million,
$736.3 million, respectively, for the purchase of receivables and operating
lease assets.
TFC and Textron are parties to several agreements, collectively referred to
as operating agreements, which govern many areas of the TFC-Textron
relationship.
Under operating agreements with Textron, TFC has recourse to Textron with
respect to certain finance receivables and operating leases. Finance receivables
of $840.6 million at January 1, 2000, and $540.2 million at January 2, 1999, and
operating leases of $69.1 million at January 1, 2000, and $76.6 million at
January 2, 1999, were subject to recourse to Textron or due from Textron. In
addition, TFC had recourse to Textron on subordinated certificates of $26.8
million and $27.2 million at year-end 1999 and 1998, respectively, and on cash
reserves of $10.2 million at year-end 1999 and 1998. Both the subordinated
certificates and the cash reserves were related to receivable securitizations.
Under the operating agreements between Textron and TFC, Textron has made
available to TFC a $100 million line of credit for junior subordinated
borrowings at the prime interest rate (8.50% at January 1, 2000). TFC had no
borrowings under this line at January 1, 2000 or January 2, 1999. In addition,
Textron has agreed to lend TFC, interest-free, an amount not to exceed the
deferred income tax liability of Textron attributable to the manufacturing
profit deferred for tax purposes on products manufactured by Textron and
financed by TFC. The Company had borrowings from Textron of $18.6 million at
January 1, 2000 ($18.8 million at January 2, 1999) under this arrangement, which
are reflected in Amounts due to Textron Inc. on TFC's consolidated balance
sheet.
Textron has also agreed with TFC to cause TFC's pretax income available for
fixed charges to be not less than 125% of its fixed charges, as defined, and its
consolidated Shareholder's equity to be not less than $200 million. No related
payments were required for 1999, 1998, or 1997.
The Company has an income tax liability of $19.0 million at January 1, 2000
as compared to $4.6 million at January 2, 1999. These amounts are included in
Accrued interest and other liabilities on TFC's consolidated balance sheet, and
will be settled with Textron as Textron manages its consolidated federal tax
position.
NOTE 3 ACQUISITIONS
During 1999 and 1998, TFC acquired the businesses listed in the table
below. The acquisitions were accounted for as purchases and accordingly, the
results of operations of each acquired business are included in the statement of
income from the date of acquisition. Goodwill, net of other identified
intangibles, is being amortized in accordance with the Company's accounting
policies. TFC is in the process of finalizing the purchase price allocation for
the fourth quarter 1999 acquisitions and expects to complete the purchase price
allocations for these acquisitions in the first quarter of 2000.
<TABLE>
<CAPTION>
FAIR VALUE OF
PURCHASE NET ASSETS
ACQUISITION PRICE ACQUIRED TYPE OF FINANCE BUSINESS
---------------------------- -------- ------------- -------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
November 3, 1999 Litchfield Financial
Corporation............... $182.5 $ 48.7 Resort and other receivables
October 1, 1999 Green Tree Financial........ 495.1 456.4 Aircraft and franchise
July 1, 1999 RFC Capital Corporation..... 18.0 4.3 Factoring
March 31, 1999 Southern Capital
Corporation............... 52.8 50.2 Specialized equipment
December 31, 1998 Business Leasing Group...... 186.4 174.4 Small ticket equipment
February 20, 1998 Systran Financial Services
Corporation............... 22.8 8.2 Factoring
</TABLE>
28
<PAGE> 30
NOTE 4 RECEIVABLE SECURITIZATIONS
The Company securitized $273 million and $401 million of loan and lease
receivables in the third quarters of 1998 and 1997, respectively. These
transactions resulted in gains of $3.4 million and $3.5 million in 1998 and
1997, respectively. Retained interests in transferred assets consist primarily
of subordinated certificates totaling $27 million at year-end 1999 and 1998, as
well as interest-only securities. Additionally, $4 million of proceeds were used
to fund a restricted cash reserve to support the 1998 transaction, as compared
to $6 million for the 1997 transaction. Both the subordinated certificates and
the cash reserve are included in Other assets on TFC's consolidated balance
sheet. TFC did not recognize a servicing asset or liability.
Interest-only securities represent the right to receive certain cash flows
which exceed the amount of cash flows sold in the Company's securitized contract
sale. Interest-only securities generally represent the value of interest to be
collected on the underlying financial contracts of the securitization over the
sum of the interest to be paid to security classes sold, contractual servicing
fees and credit losses. These cash flows are projected and discounted over the
expected life of the financial contracts using prepayment, default, loss and
interest rate assumptions that the Company believes market participants would
use for similar financial instruments.
TFC has entered into certain interest rate exchange agreements to mitigate
its exposure to decreases in interest rates on its interest-only securities.
Under the interest rate exchange agreements, TFC makes periodic variable rate
payments based upon the prime rate and one- and six-month LIBOR and receives
fixed rate payments.
These interest rate exchange agreements are adjusted periodically to match
the amortization of the variable rate contracts in the securitized portfolio and
are summarized in the following table:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(Dollars in millions)
<S> <C> <C>
Prime rate.................................................. 8.50% 7.75%
One-month LIBOR............................................. 5.82% 4.94%
Six-month LIBOR............................................. 6.13% 4.94%
1998 SECURITIZATION
Notional principal -- variable payments tied to the prime
rate...................................................... $39.1 $55.3
Fixed rate (received)....................................... 7.94% 7.94%
Notional principal -- variable payments tied to one-month
LIBOR..................................................... $19.2 $34.3
Fixed rate (received)....................................... 5.13% 5.13%
1997 SECURITIZATION
Notional principal -- variable payments tied to the prime
rate...................................................... $13.1 $46.6
Fixed rate (received)....................................... 8.77% 8.77%
Notional principal -- variable payments tied to six-month
LIBOR..................................................... $11.8 $21.2
Fixed rate (received)....................................... 5.97% 5.97%
</TABLE>
Interest rate floor agreements, entered into through AAA-rated counterparts
to the Textron Financial Corporation Receivables Trusts 1998-A and 1997-A (the
Trusts), provide a minimum interest rate on variable rate receivables held by
the Trusts and are tied to both the prime rate and one- and six-month LIBOR. The
Trusts receive payments when the floor rate exceeds the corresponding index
interest rate. These interest rate floor agreements are adjusted periodically to
match the amortization of the variable rate contracts in the securitized
portfolio and are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(Dollars in millions)
<S> <C> <C>
Prime rate.................................................. 8.50% 7.75%
One-month LIBOR............................................. 5.82% 4.94%
Six-month LIBOR............................................. 6.13% 4.94%
</TABLE>
29
<PAGE> 31
<TABLE>
<CAPTION>
1999 1998
-------- --------
(Dollars in millions)
<S> <C> <C>
1998 SECURITIZATION
Notional principal tied to the prime rate................... $43.4 $57.6
Floor rate.................................................. 8.50% 8.50%
Notional principal tied to one-month LIBOR.................. $19.8 $36.5
Floor rate.................................................. 5.34% 5.34%
1997 SECURITIZATION
Notional principal tied to the prime rate................... $17.1 $70.5
Floor rate.................................................. 8.50% 8.50%
Notional principal tied to six-month LIBOR.................. $15.2 $37.1
Floor rate.................................................. 5.65% 5.65%
</TABLE>
TFC also has a securitization program consisting of a $125 million interest
in a designated pool of fixed and floating installment contracts. Effective July
1, 1999, TFC discontinued the sale of eligible assets into the pool.
NOTE 5 FINANCE RECEIVABLES
Contractual Maturities
The contractual maturities of finance receivables outstanding at January 1,
2000 were as follows:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 THEREAFTER TOTAL
---------- -------- -------- -------- -------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Installment contracts.......... $ 398,547 $299,201 $242,589 $203,164 $147,034 $ 846,731 $2,137,266
Revolving loans................ 613,150 170,068 288,231 176,666 89,872 62,076 1,400,063
Floorplan receivables.......... 571,694 77,389 5,115 2,450 431 -- 657,079
Golf course and resort
mortgages.................... 110,120 37,298 115,574 49,786 75,533 147,071 535,382
Finance leases................. 119,018 113,505 100,736 83,186 41,905 51,063 509,413
Leveraged leases............... 14,488 (5,169) (7,251) (6,589) 31,862 320,520 347,861
Commercial real estate
mortgages.................... 12,832 -- -- -- -- -- 12,832
---------- -------- -------- -------- -------- ---------- ----------
Total finance receivables...... $1,839,849 $692,292 $744,994 $508,663 $386,637 $1,427,461 $5,599,896
========== ======== ======== ======== ======== ========== ==========
</TABLE>
Finance receivables often are repaid or refinanced prior to contractual
maturity. Accordingly, the above tabulation should not be regarded as a forecast
of future cash collections. The ratio of cash collections (net of finance
charges) to average net receivables, excluding floorplan receivables and
revolving loans, was approximately 55% in 1999 and 56% in 1998. During 1999 and
1998, cash collections of finance receivables (excluding proceeds from sales of
receivable portfolios) were $3.87 billion and $3.41 billion, respectively.
Installment contracts and finance leases have initial terms generally
ranging from one to 12 years. Installment contracts and finance leases are
secured by the financed equipment and, in some instances, by the personal
guarantee of the principals or recourse arrangements with the originating
vendor. Finance leases include residual values expected to be realized at
contractual maturity.
Revolving loans generally have terms of one to three years, and at times
convert to term loans that contractually amortize over an average term of seven
years. Revolving loans consist of loans secured by trade receivables, inventory,
plant and equipment, pools of vacation interval notes receivable and the
underlying real property. Floorplan receivables generally mature within one
year. Floorplan receivables are secured by the inventory of the financed
distributor or dealer and, in some programs, by recourse arrangements with the
originating manufacturer. Revolving loans and floorplan receivables are cyclical
and result in cash turnover that is several times larger than contractual
maturities. In 1999, such cash turnover was 2.8 times contractual maturities.
Golf course mortgages have initial terms generally ranging from three to
seven years with amortization periods from 15 to 20 years. Resort mortgages
generally represent construction loans with terms up to
30
<PAGE> 32
24 months. Golf course and resort mortgages are secured by real property and are
generally limited to 75% or less of the property's appraised market value at
loan origination. Golf course mortgages, totaling $426.5 million, consists of
loans with an average balance of $5.6 million with an average remaining
contractual maturity of five years. Resort mortgages, totaling $108.9 million,
consists of loans with an average balance of $6.1 million with an average
remaining contractual maturity of 18 months.
Leveraged leases are secured by the ownership of the leased asset that
include both equipment and real property. Leveraged leases reflect contractual
maturities net of contractual nonrecourse debt payments and include residual
values expected to be realized at contractual maturity. Leveraged leases have
initial terms up to approximately 30 years.
TFC's finance receivables are diversified across geographic region,
borrower industry and type of collateral. TFC's owned and securitized receivable
geographic concentrations at January 1, 2000 were as follows: Southeast 26%; Far
West 16%; Southwest 12%; Great Lakes 11%; Mideast 9%; Plains 6%; New England 5%;
other domestic 5%; South America 5%; and other international 5%. TFC's most
significant collateral concentration was aircraft, which accounted for 26% of
owned and securitized receivables (23% of owned receivables) at January 1, 2000.
There were no significant industry concentrations at January 1, 2000.
Finance Leases
<TABLE>
<CAPTION>
1999 1998
--------- --------
(In thousands)
<S> <C> <C>
Total minimum lease payments receivable..................... $ 452,766 $390,232
Estimated residual values of leased equipment............... 164,416 130,403
--------- --------
617,182 520,635
Unearned income............................................. (107,769) (96,199)
--------- --------
Net investment in finance leases............................ $ 509,413 $424,436
========= ========
</TABLE>
Minimum lease payments due under finance leases for each of the next five
years and the aggregate amounts due thereafter are as follows: $138.5 million in
2000; $116.2 million in 2001; $86.5 million in 2002; $54.9 million in 2003;
$25.8 million in 2004 and $30.9 million thereafter.
Leveraged Leases
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
Rental receivable (net of principal and interest on
nonrecourse debt)......................................... $ 203,423 $ 200,134
Estimated residual values of leased assets.................. 425,041 428,809
Less unearned income........................................ (280,603) (283,070)
--------- ---------
Investment in leveraged leases.............................. 347,861 345,873
Deferred income taxes....................................... (259,792) (255,034)
Fees payable................................................ (386) (1,607)
--------- ---------
Net investment in leveraged leases.......................... $ 87,683 $ 89,232
========= =========
</TABLE>
Approximately 65% of TFC's investment in leveraged leases is collateralized
by real estate.
The components of income from leveraged leases were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Income recognized including investment tax credits.......... $23,139 $16,426 $14,717
Income tax expense.......................................... (8,844) (6,237) (5,089)
------- ------- -------
Income from leveraged leases................................ $14,295 $10,189 $ 9,628
======= ======= =======
</TABLE>
31
<PAGE> 33
Loan Impairment
At January 1, 2000 and January 2, 1999, the Company had nonaccrual loans
and leases totaling $83.6 million and $69.9 million, respectively. Approximately
$65.4 million and $46.5 million of these respective amounts were considered
impaired. Finance leases and homogenous loan portfolios are excluded from the
impaired assets. Cash payments, including finance charges on nonaccrual
accounts, generally are applied to reduce loan principal. The allowance for
losses on receivables related to impaired loans was $20.8 million at January 1,
2000 and $14.9 million at January 2, 1999.
The average recorded investment in impaired loans during 1999 and 1998 was
$46.6 million and $50.7 million, respectively. Nonaccrual accounts resulted in
TFC's revenues being reduced by $4.7 million in 1999, $5.1 million in 1998, and
$5.6 million in 1997. No interest income was recognized using the cash basis
method.
Allowance for Losses on Receivables
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year............................... $ 83,887 $ 77,394 $ 74,824
Provision for losses....................................... 32,067 20,483 21,824
Receivable charge-offs..................................... (28,293) (21,181) (24,848)
Recoveries................................................. 4,676 4,860 6,294
Acquisitions and others.................................... 20,432 2,331 (700)
-------- -------- --------
Balance at end of year..................................... $112,769 $ 83,887 $ 77,394
======== ======== ========
</TABLE>
Managed Finance Receivables
TFC manages finance receivables for a variety of investors, participants
and third-party portfolio owners.
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
Owned receivables........................................... $5,599,896 $3,611,397
Securitized receivables..................................... 613,860 616,220
---------- ----------
6,213,756 4,227,617
Nonrecourse participations.................................. 493,238 228,357
Third-party portfolio servicing............................. 89,507 30,908
SBA sales agreements........................................ 28,280 21,958
---------- ----------
Total managed finance receivables........................... $6,824,781 $4,508,840
========== ==========
</TABLE>
NOTE 6 EQUIPMENT ON OPERATING LEASES
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Equipment on operating leases, at cost:
Aircraft.................................................. $150,167 $147,261
Golf cars................................................. 11,133 --
Accumulated depreciation:
Aircraft and golf cars.................................... (28,129) (28,671)
-------- --------
Equipment on operating leases -- net........................ $133,171 $118,590
======== ========
</TABLE>
Initial lease terms of equipment on operating leases range from one year to
ten years. Future minimum rentals at January 1, 2000 are $19.1 million in 2000;
$13.5 million in 2001; $10.7 million in 2002; $6.7 million in 2003; and $5.4
million in 2004; and $9.1 thereafter.
32
<PAGE> 34
NOTE 7 OTHER ASSETS
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Goodwill -- net............................................. $211,378 $ 27,093
Securitization related assets............................... 51,252 46,092
Fixed assets -- net......................................... 29,214 19,853
Other long-term investments................................. 17,799 5,997
Other....................................................... 42,163 17,007
-------- --------
Total other assets.......................................... $351,806 $116,042
======== ========
</TABLE>
The cost of fixed assets is being depreciated using the straight-line
method based on estimated useful lives of the assets. Depreciation expense was
$5.4 million in 1999, $3.5 million in 1998 and $2.1 million in 1997.
TFC acquired Litchfield Financial Corporation (Litchfield) on November 3,
1999. Litchfield had retained interests associated with securitizations prior to
acquisition. These retained interests are included in the above table.
NOTE 8 DEBT AND CREDIT FACILITIES
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
Short-term debt:
Commercial paper.......................................... $1,004,200 $1,185,591
Short-term debt........................................... 334,821 239,281
---------- ----------
Total short-term debt............................. 1,339,021 1,424,872
Long-term debt:
5.66% -- 5.86% notes; due 2000 to 2002.................... 233,000 33,000
6.13% -- 6.51% notes; due 2000 to 2001.................... 112,500 204,000
7.13% -- 7.67% notes; due 2000 to 2004.................... 1,140,013 234,958
9.3% Litchfield note; due 2004............................ 21,224 --
Variable rate notes due 2000 to 2002...................... 1,705,000 932,000
---------- ----------
Total long-term debt.............................. 3,211,737 1,403,958
---------- ----------
Total debt........................................ $4,550,758 $2,828,830
========== ==========
</TABLE>
TFC has lines of credit with a bank group aggregating $1.2 billion at
January 1, 2000, of which $400 million will expire in 2000 and $800 million will
expire in 2003. TFC's lines of credit, including the line of credit with
Textron, not used or reserved as support for commercial paper at January 1, 2000
were $296 million. TFC also maintains a $50 million (Canadian) facility, which
expires in 2000 and was fully drawn at year-end. TFC generally pays fees in
support of these lines.
The weighted average interest rates on short-term borrowings, before
consideration of the effect of interest rate exchange agreements at year-end,
were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Commercial paper............................................ 6.59% 6.12% 6.14%
Short-term debt............................................. 5.90% 6.91% 5.54%
</TABLE>
The corresponding weighted average interest rates on these borrowings
during the last three years were 5.40% in 1999, 5.83% in 1998 and 5.77% in 1997.
Weighted average interest rates have been determined by relating interest costs
for each year to the daily average dollar amounts outstanding.
Interest on TFC's variable rate notes is tied to the three-month LIBOR for
U.S. dollar deposits. The weighted average interest rate on these notes was
6.39% at January 1, 2000 and 5.79% at January 2, 1999.
33
<PAGE> 35
The amount of net assets available for dividends and other payments to
Textron is restricted by the terms of the Company's lending agreements. At
January 1, 2000, $332.4 million of net assets were available to be transferred
to Textron under the most restrictive covenant. The lending agreements contain
various restrictive provisions regarding additional debt (not to exceed 800% of
consolidated net worth and qualifying subordinated obligations), minimum net
worth ($200 million), the creation of liens and the maintenance of a fixed
charges coverage ratio (not less than 125%).
Required principal payments during the next five years on long-term debt
outstanding at January 1, 2000 are as follows: $507.5 million in 2000; $833.0
million in 2001; $1,040.0 million in 2002; $213.0 million in 2003 and $618.2
million in 2004.
Cash payments made by TFC for interest were $181.9 million in 1999, $152.9
million in 1998 and $153.0 million in 1997.
NOTE 9 INTEREST RATE EXCHANGE AGREEMENTS
Under interest rate exchange agreements, TFC makes periodic fixed payments
in exchange for periodic variable payments and vice versa. TFC has entered into
such agreements to mitigate its exposure to increases in interest rates.
Interest rate exchange agreements, excluding those related to
securitizations, were designated against specific short- and long-term notes and
had the effect of adjusting the average rate of interest during the year to
5.64% from 5.57% on variable rate notes and to 6.74% from 6.79% on fixed rate
notes. Interest rate exchange agreements in effect on January 1, 2000 will
expire both in 2000 and 2001.
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Weighted average original term.............................. 1.2 YEARS 2.5 years
NOTIONAL PRINCIPAL.......................................... $ 300,000 $ 250,000
Fixed weighted average interest rate (paid)................. 5.76% 6.26%
Variable weighted average interest rate (received).......... 6.16% 5.27%
NOTIONAL PRINCIPAL.......................................... -- $ 50,000
Fixed weighted average interest rate (received)............. -- 6.30%
Variable weighted average interest rate (paid).............. -- 5.22%
NOTIONAL PRINCIPAL-BASIS SWAP............................... $ 125,000 --
Float based on LIBOR (received)............................. 6.07% --
Float based on the prime rate (paid)........................ 5.84% --
</TABLE>
NOTE 10 MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING
DEBENTURES
Prior to TFC's acquisition of Litchfield on November 3, 1999, a trust,
sponsored and wholly-owned by Litchfield, issued $26.2 million of preferred
securities to the public. The trust subsequently invested in $26.2 million
aggregate principal amount of Litchfield 10% Series A Junior Subordinated
Debentures (Series A Debentures), due 2029. The debentures are the sole asset of
the trust. The amounts due to the trust under the subordinated debentures and
the related income statement amounts have been eliminated in TFC's consolidated
financial statements.
The preferred securities accrue and pay cash distributions quarterly at a
rate of 10% per annum. The trust's obligation under the Series A Preferred
Securities are fully and unconditionally guaranteed by Litchfield. The trust
will redeem all of the outstanding Series A Preferred Securities when the Series
A Debentures are paid at maturity on June 30, 2029, or otherwise become due.
Litchfield will have the right to redeem 100% of the principal plus accrued and
unpaid interest on or after June 30, 2004.
As a result of the acquisition, TFC has agreed on a subordinated basis to
make payments to the holders of the preferred securities, when due, to the
extent not paid by or on behalf of the trust or the subsidiary. Accordingly, TFC
has disclosed certain summary financial information of Litchfield and its
subsidiary. This
34
<PAGE> 36
information, for the year ended January 1, 2000, includes the operating results
for the ten months preceding the acquisition by TFC.
The summary financial information of Litchfield and its subsidiary has been
prepared on an historical cost basis. Accordingly, the effects of certain
purchase price adjustments to the assets and liabilities of Litchfield and its
results of operations have been eliminated from the Litchfield information
provided in the table below:
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AT AND FOR THE YEAR ENDED JANUARY 1, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONSOLIDATED
TFC EXCLUDING
LITCHFIELD AND SUBSIDIARY ADJUSTMENTS/ CONSOLIDATED
SUBSIDIARY TRUST LITCHFIELD TRUST ELIMINATIONS TFC
---------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CONDENSED CONSOLIDATED STATEMENT
OF INCOME
Revenues....................... $ 452,462 $ 49,052 $ 1,718 $(40,329)(1) $ 462,903
Expenses....................... 325,001 41,825 1,718 (34,173)(1)(2) 334,371
---------- -------- ------- -------- ----------
Income before income taxes and
distributions on preferred
securities................... 127,461 7,227 -- (6,156) 128,532
Income taxes................... 48,972 2,767 -- (2,354)(1)(2) 49,385
Distributions of preferred
securities (net of tax
benefit)..................... -- 1,058 -- (815)(1)(2) 243
---------- -------- ------- -------- ----------
Net income..................... $ 78,489 $ 3,402 $ -- $ (2,987) $ 78,904
========== ======== ======= ======== ==========
CONDENSED CONSOLIDATED BALANCE
SHEET
Total assets................... $5,249,147 $631,200 $26,200 $ 82,936(2) $5,989,483
========== ======== ======= ======== ==========
Total liabilities.............. 4,564,179 559,558 -- (31,954)(2) 5,091,783
Mandatorily reedemable
preferred securities of
subsidiary trust holding
debentures of Litchfield
Financial Services........... -- -- 26,200 2,339(2) 28,539
Total shareholder's equity..... 684,968 71,642 -- 112,551(2) 869,161
---------- -------- ------- -------- ----------
Total liabilities and
shareholder's equity......... $5,249,147 $631,200 $26,200 $ 82,936 $5,989,483
========== ======== ======= ======== ==========
</TABLE>
- ---------------
(1) Elimination of the operating results of Litchfield and Subsidiary Trust for
the ten months prior to the acquisition.
(2) Purchase price adjustments required to state acquired assets and liabilities
at fair value and the amortization of goodwill associated with the
acquisition.
35
<PAGE> 37
NOTE 11 INCOME TAXES
Income before income taxes and distributions on preferred securities is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Current:
United States............................................ $126,837 $110,738 $106,018
Foreign.................................................. 1,695 1,888 2,061
-------- -------- --------
Total............................................ $128,532 $112,626 $108,079
======== ======== ========
</TABLE>
The components of income taxes were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Current:
Federal................................................... $47,514 $34,619 $32,324
State..................................................... 5,666 5,377 3,224
Foreign................................................... 763 826 863
------- ------- -------
Total current income taxes.................................. 53,943 40,822 36,411
Deferred:
Federal................................................... (6,145) 544 3,045
State..................................................... 1,587 1,684 882
------- ------- -------
Total deferred income taxes....................... (4,558) 2,228 3,927
------- ------- -------
Total income taxes................................ $49,385 $43,050 $40,338
======= ======= =======
</TABLE>
Cash paid for income taxes was $34.9 million in 1999, $26.1 million in 1998
and $44.3 million in 1997. The federal statutory income tax rate is reconciled
to the effective income tax rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate........................... 35.0% 35.0% 35.0%
State income taxes.......................................... 4.0 4.1 2.6
Tax exempt interest......................................... (0.3) (0.3) (0.4)
Goodwill.................................................... 0.6 -- --
Other, net.................................................. (0.9) (0.6) 0.1
---- ---- ----
Effective income tax rate................................... 38.4% 38.2% 37.3%
==== ==== ====
</TABLE>
36
<PAGE> 38
The components of TFC's deferred tax assets and liabilities were as
follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for losses...................................... $ 35,756 $ 31,599
State net operating losses................................ 5,818 4,573
Deferred origination fees................................. 4,730 2,013
Nonaccrual loans.......................................... 3,325 2,674
Other..................................................... 17,287 5,416
-------- --------
Total deferred tax assets................................... 66,916 46,275
Less: valuation allowance................................... (1,245) --
-------- --------
Net deferred tax assets..................................... $ 65,671 $ 46,275
======== ========
Deferred tax liabilities:
Leveraged leases.......................................... $259,792 $255,034
Finance leases............................................ 81,286 76,179
Equipment on operating leases............................. 25,325 25,719
Other..................................................... 6,303 10,864
-------- --------
Total deferred tax liabilities.................... 372,706 367,796
-------- --------
Net deferred tax liabilities...................... $307,035 $321,521
======== ========
</TABLE>
At January 1, 2000 TFC had state net operating loss carryforwards of
approximately $112 million available to offset future state taxable income. The
state net operating loss carryforwards will expire in years 2000 through 2014.
The valuation allowance reported above represents the tax effect of certain
state net operating loss carryforwards. TFC is unable to conclude that "more
likely than not" it will realize the benefit from such carryforwards.
NOTE 12 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used in estimating the fair
value of TFC's financial instruments:
Finance Receivables
The estimated fair values of fixed rate installment contracts, real estate
loans, floorplan receivables and revolving loans were estimated based on
discounted cash flow analyses using interest rates currently being offered for
similar loans to borrowers of similar credit quality. Estimated future cash
flows were adjusted for TFC's estimates of prepayments, refinances and loan
losses based on internal historical data. The estimated fair values of all
variable rate receivables approximated the net carrying value of such
receivables. The estimated fair values of nonperforming loans were based on
independent appraisals, discounted cash flow analyses using risk adjusted
interest rates, or TFC valuations based on the fair value of the related
collateral. The fair values of TFC's finance leases, leveraged leases and
operating leases ($509.4 million, $347.9 million and $133.2 million, net
carrying amount, respectively, at January 1, 2000 and $424.4 million, $345.9
million and $118.6 million, net carrying amount, respectively, at January 2,
1999) are not required to be disclosed under generally accepted accounting
principles. As a result, a significant portion of the assets which are included
in the Company's asset and liability management strategy are excluded from this
fair value disclosure.
Debt, Interest Rate Exchange Agreements and Foreign Currency Exchange
Agreements
The estimated fair value of fixed rate debt was determined by either
independent investment bankers or discounted cash flow analyses using interest
rates for similar debt with maturities similar to the remaining
37
<PAGE> 39
terms of the existing debt. The fair values of variable rate debt and short-term
borrowings supported by credit facilities approximated their carrying values.
The estimated fair values of interest rate exchange agreements and foreign
currency exchange agreements were determined by independent investment bankers
and represent the estimated amounts that TFC would be required to pay to (or
collect from) a third-party to assume TFC's obligations under the agreements.
The carrying values and estimated fair values of TFC's financial
instruments for which it is practicable to calculate a fair value are as
follows:
<TABLE>
<CAPTION>
1999 1999 1998 1998
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
ASSETS:
Installment contracts........................... $2,137,266 $2,080,226 $1,338,644 $1,343,642
Revolving loans................................. 1,400,063 1,394,442 555,571 555,577
Floorplan receivables........................... 657,079 655,902 572,289 571,810
Golf course and resort mortgages................ 535,382 528,686 342,844 347,988
Subordinated certificates....................... 27,280 27,280 27,214 27,214
Commercial real estate mortgages................ 12,832 5,645 31,740 18,015
Trustee cash reserve............................ 12,097 12,097 10,210 10,210
Investments in equity partnerships.............. 11,435 11,435 5,997 5,997
Interest-only securities........................ 6,411 6,411 8,668 8,668
Allowance for loan losses....................... (95,882) -- (67,024) --
---------- ---------- ---------- ----------
$4,703,963 $4,722,124 $2,826,153 $2,889,121
========== ========== ========== ==========
LIABILITIES:
Commercial paper and short-term debt............ $1,339,021 $1,339,021 $1,424,872 $1,424,872
Variable rate long-term notes................... 1,705,000 1,705,000 932,000 932,000
Fixed rate long-term debt....................... 1,506,737 1,490,666 471,958 479,075
Interest-free loan due Textron Inc. ............ 18,633 15,259 18,810 15,662
Foreign currency exchange agreements............ -- 71 -- (55)
Interest rate exchange agreements............... -- (1,628) -- 1,301
---------- ---------- ---------- ----------
$4,569,391 $4,548,389 $2,847,640 $2,852,855
========== ========== ========== ==========
</TABLE>
NOTE 13 COMMITMENTS
TFC generally enters into various commitments and letters of credit in
response to the financing needs of its customers. Commitments to fund new and
existing borrowers have fixed expiration dates, termination clauses and
typically require payment of a fee. Letters of credit are conditional
commitments issued by the Company to guarantee the performance of a borrower or
an affiliate to a third-party. Generally, interest rates on these commitments
are not set until the loans are funded; therefore, TFC is not exposed to
interest rate changes.
These financial instruments generate fees and involve, to varying degrees,
elements of credit risk in excess of amounts recognized in the consolidated
balance sheet. As many of the agreements are expected to expire unused, the
total commitment amount does not necessarily represent future cash requirements.
The credit risk involved in issuing these instruments is essentially the same as
that involved in extending loans to borrowers and the credit quality and
collateral policies for controlling this risk are similar to those involved in
the Company's normal lending transactions.
38
<PAGE> 40
The contractual amount of the Company's outstanding commitments and letters
of credit are shown below:
<TABLE>
<CAPTION>
DUE TO EXPIRE
---------------------------------
WITHIN ONE YEAR AFTER ONE YEAR TOTAL 1999
--------------- -------------- ----------
(In millions)
<S> <C> <C> <C>
Commitments to extend credit:
Loans and leases..................................... $ 57.5 $ 21.1 $ 78.6
Contingent loan commitments.......................... -- 89.0 89.0
Unused secured revolving credit...................... 247.2 688.2 935.4
Letters of credit:
Standby letters of credit............................ 1.0 25.6 26.6
Other letters of credit.............................. -- 4.2 4.2
</TABLE>
TFC's offices are occupied under noncancelable operating leases expiring on
various dates through 2007. Rental expense was $4.4 million in 1999 ($3.5
million in 1998 and $2.5 million in 1997). Future minimum rental commitments for
all noncancelable operating leases in effect at January 1, 2000 approximated
$3.9 million for 2000; $3.0 million for 2001; $2.7 million for 2002; $2.0
million for 2003; $1.6 million for 2004; and $1.7 million thereafter. Of these
amounts, $1.3 million in 2000, $0.7 million in 2001, $0.4 million in 2002 and
$0.1 million in 2003 are payable to Textron and its subsidiaries.
NOTE 14 CONTINGENCIES
There are pending or threatened against TFC and its subsidiaries lawsuits
and other proceedings. Among these suits and proceedings are some which seek
compensatory, treble or punitive damages in substantial amounts. These suits and
proceedings are being defended or contested on behalf of TFC and its
subsidiaries. On the basis of information presently available, TFC believes any
such liability would not have a material effect on TFC's net income or financial
condition.
NOTE 15 FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
At year-end 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which requires segment data to be measured and analyzed on a basis
that is consistent with how business activities are reported internally for
management. The Company's business segments are organized based on the nature of
products and services provided. The Commercial Real Estate segment is inactive.
The accounting policies for these segments are the same as those described for
the consolidated entity.
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Term Loans and Leases................... $ 256,171 55% $ 216,643 59% $ 240,419 69%
Revolving Credit........................ 111,370 24% 87,835 24% 62,784 18%
Specialty Finance....................... 95,302 21% 62,685 17% 45,364 13%
Commercial Real Estate.................. 60 -- (1) -- 1,653 --
---------- --- ---------- --- ---------- ---
Total revenues............................ $ 462,903 100% $ 367,162 100% $ 350,220 100%
Income before taxes and distribution on
preferred securities(1)(2)
Term Loans and Leases................... $ 67,920 $ 70,304 $ 81,809
Revolving Credit........................ 28,629 26,398 18,524
Specialty Finance....................... 34,951 26,752 19,509
Commercial Real Estate.................. (2,968) (10,828) (11,763)
---------- ---------- ----------
Total income before taxes and distribution
on preferred securities................. $ 128,532 $ 112,626 $ 108,079
</TABLE>
39
<PAGE> 41
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Finance assets(3)
Term Loans and Leases................... $2,926,573 $2,144,429 $1,939,622
Revolving Credit........................ 1,077,570 831,165 548,215
Specialty Finance....................... 1,716,092 722,653 643,143
Commercial Real Estate.................. 12,832 31,740 49,661
---------- ---------- ----------
Total finance assets............ $5,733,067 $3,729,987 $3,180,641
========== ========== ==========
</TABLE>
- ---------------
(1) Interest expense is allocated to each segment in proportion to its net
investment in finance assets. Net investment in finance assets includes
deferred income taxes, security deposits and other specifically identified
liabilities. The interest allocated matches variable rate debt with variable
rate financing assets and fixed rate debt with fixed rate financing assets.
(2) Indirect expenses are allocated to each segment based on the utilization of
such resources. Most allocations are based on the segments proportion of net
investment in finance assets, headcount, number of transactions, computer
resources and senior management time.
(3) Finance assets include finance receivables and equipment on operating
leases, net of accumulated depreciation, but exclude repossessed assets and
beneficial interests in securitized assets (classified as other assets in
TFC's consolidated balance sheet).
NOTE 16 QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
----------------- ------------------ ------------------ ------------------
1999 1998 1999 1998 1999 1998 1999 1998
------- ------- -------- ------- -------- ------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $96,243 $85,390 $103,295 $90,870 $122,367 $98,509 $140,998 $92,393
Expenses............. 70,571 60,812 72,862 63,898 84,238 65,365 106,700 64,461
Net income........... 15,746 15,074 18,671 16,548 23,693 20,317 20,794 17,637
======= ======= ======== ======= ======== ======= ======== =======
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted per Instruction I of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Omitted per Instruction I of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted per Instruction I of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted per Instruction I of Form 10-K.
40
<PAGE> 42
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of TFC and subsidiaries are
included in Item 8:
1. Consolidated statement of income -- Years ended January 1, 2000, January
2, 1999, and January 3, 1998
2. Consolidated balance sheet -- January 1, 2000 and January 2, 1999
3. Consolidated statement of cash flows -- Years ended January 1, 2000,
January 2, 1999, and January 3, 1998
4. Consolidated statement of changes in shareholder's equity -- Years ended
January 1, 2000, January 2, 1999, January 3, 1998, and December 28, 1996
5. Notes to consolidated financial statements -- January 1, 2000
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
EXHIBITS
The following is an Index of Exhibits required by Item 601 of Regulation
S-K filed with the Securities and Exchange Commission as part of this report.
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<C> <S>
3.1* Restated Certificate of Incorporation of TFC, dated July 19,
1993
3.2* By-Laws of TFC as of May 4, 1999
4.1 Long-term debt instruments with principal amounts not
exceeding 10% of TFC's total consolidated assets are not
filed as exhibits to this Report. TFC will furnish a copy of
those agreements to the SEC upon its request.
10.1* Support Agreement dated as of May 25, 1994, between TFC and
Textron
10.2* Receivables Purchase Agreement between TFC and Textron dated
as of January 1, 1986
10.3* Tax Sharing Agreement between TFC and Textron dated as of
December 29, 1990
12.1 Computation of Ratios of Earnings to Fixed Charges
23.1 Consent of Independent Auditors
24.1 Power of Attorney dated as of March 15, 2000
27.1 Financial Data Schedule
</TABLE>
- ---------------
* Incorporated by reference to the Exhibit with the same number as TFC's
Registration statement on Form 10 (File No. 0-27559)
41
<PAGE> 43
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended January 1, 2000.
Textron, Cessna, Bell, E-Z-Go, Cushman, Ransomes, Jacobsen, Systran, RFC
Capital, Litchfield Financial Corporation, and OmniQuip and their related
trademark designs and logotypes (and variations of the foregoing) are
trademarks, trade names or service marks of Textron Inc., its subsidiaries,
affiliates, or joint ventures.
42
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized on
this 17th day of March 2000.
Textron Financial Corporation
Registrant
By: /s/ STEPHEN A. GILIOTTI
------------------------------------
Stephen A. Giliotti
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on this 17th day of March 2000, by the following
persons on behalf of the registrant and in the capacities indicated:
By: /s/ STEPHEN A. GILIOTTI
------------------------------------
Stephen A. Giliotti
Chairman, President and Chief
Executive Officer, Director
(Principal Executive Officer)
By: *
------------------------------------
Edward C. Arditte
Director
By: *
------------------------------------
Lewis B. Campbell
Director
By: *
------------------------------------
John A. Janitz
Director
By: *
------------------------------------
Terrence O'Donnell
Director
By: /s/ THOMAS J. CULLEN
------------------------------------
Thomas J. Cullen
Executive Vice President and Chief
Financial
Officer (Principal Financial
Officer)
By: /s/ ERIC SALANDER
------------------------------------
Eric Salander
Vice President, Finance (Principal
Accounting Officer)
*By: /s/ ELIZABETH C. PERKINS
-----------------------------------
Elizabeth C. Perkins
Attorney-in-fact
43
<PAGE> 1
EXHIBIT 12.1
TEXTRON FINANCIAL CORPORATION
STATEMENT SETTING FORTH COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Income before income taxes and
distributions on preferred
securities............................ $128,532 $112,626 $108,079 $ 95,724 $ 88,600
-------- -------- -------- -------- --------
FIXED CHARGES:
Interest on debt........................ 203,817 155,126 153,127 146,615 146,649
Estimated interest portion of rents..... 1,515 1,198 879 817 680
-------- -------- -------- -------- --------
Total fixed charges..................... 205,332 156,324 154,006 147,432 147,329
-------- -------- -------- -------- --------
Adjusted Income......................... 333,864 268,950 262,085 243,156 235,929
Ratio of earnings to fixed charges...... 1.63x 1.72x 1.70x 1.65x 1.60x
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) The ratio of earnings to fixed charges has been computed by dividing income
before income taxes and distributions on preferred securities and fixed
charges by fixed charges. Fixed charges consist of interest on debt and
one-third rental expense as representative of interest portion of rentals.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 333-88509) of Textron Financial Corporation and in the related
Prospectus of our report dated January 25, 2000, with respect to the
consolidated financial statements of Textron Financial Corporation included in
this Annual Report (Form 10-K) for the year ended January 1, 2000.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
March 15, 2000
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
The undersigned, Textron Financial Corporation ("TFC") a Delaware
corporation, and the undersigned directors and officers of TFC, do hereby
constitute and appoint Elizabeth C. Perkins and William J. Clegg, and each of
them, with full powers of substitution, their true and lawful attorneys and
agents to do or cause to be done any and all acts and things and to execute and
deliver any and all instruments and documents which said attorneys and agents,
or any of them, may deem necessary or advisable in order to enable TFC to comply
with the Securities and Exchange Act of 1934, as amended, and any requirements
of the Securities and Exchange Commission in respect thereof, in connection with
the filing of TFC's Annual Report on Form 10-K for the fiscal year ended January
1, 2000, including specifically, but without limitation, power and authority to
sign the names of the undersigned directors and officers in the capacities
indicated below and to sign the names of such officers on behalf of TFC to such
Annual Report filed with the Securities and Exchange Commission, to any and all
amendments to such Annual Report, to any instruments or documents or other
writings in which the original or copies thereof are to be filed as a part of or
in connection with such Annual Report or amendments thereto, and to file or
cause to be filed the same with the Securities and Exchange Commission; and each
of the undersigned hereby ratifies and confirms all that such attorneys and
agents, and each of them, shall do or cause to be done hereunder and such
attorneys and agents, and each of them, shall have, and may exercise, all of the
powers hereby conferred.
IN WITNESS WHEREOF, TFC has caused this Power of Attorney to be executed
and delivered in its name and on its behalf by the undersigned duly authorized
officer and its corporate seal affixed, and each of the undersigned has signed
his or her name thereto, on this 15th day of March, 2000.
TEXTRON FINANCIAL CORPORATION
By: /s/ STEPHEN A. GILIOTTI
------------------------------------
Stephen A. Giliotti
Chairman, President & CEO
ATTEST:
/s/ ELIZABETH C. PERKINS
- ---------------------------------------------------------
Elizabeth C. Perkins
Executive Vice President,
General Counsel and Secretary
/s/ LEWIS B. CAMPBELL
--------------------------------------
Lewis B. Campbell
Director
/s/ JOHN A. JANITZ
--------------------------------------
John A. Janitz
Director
/s/ EDWARD C. ARDITTE
--------------------------------------
Edward C. Arditte
Director
/s/ TERRENCE O'DONNELL
--------------------------------------
Terrence O'Donnell
Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JAN-01-2000 JAN-02-1999
<PERIOD-END> JAN-01-2000 JAN-02-1999
<CASH> 17,379 22,396
<SECURITIES> 0 0
<RECEIVABLES> 5,599,896 3,611,397
<ALLOWANCES> 112,769 83,887
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 5,989,483 3,784,538
<CURRENT-LIABILITIES> 0 0
<BONDS> 4,550,758 2,828,830
28,539 0
0 0
<COMMON> 250 250
<OTHER-SE> 868,911 472,202
<TOTAL-LIABILITY-AND-EQUITY> 5,989,483 3,784,538
<SALES> 0 0
<TOTAL-REVENUES> 462,903 367,162
<CGS> 0 0
<TOTAL-COSTS> 98,487 78,927
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 32,067 20,483
<INTEREST-EXPENSE> 203,817 155,126
<INCOME-PRETAX> 128,532 112,626
<INCOME-TAX> 49,385 43,050
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 78,904 69,576
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
